April 30, 2003 - Distribution Channel Commentary (DCC) # 22


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  2. An incredible, although not surprising, story that emerged out of the first month of Major League baseball was the Yankees fast, dominating start. After their first 21 games, they: were 18-3; dominated the league in every statistic; had starters with a 17-0 record; and were off to the franchise’s best start in history all with two stars – Derek Jeter and Mariano Rivera – on the disabled list.

    The Yankees’ success is less surprising considering that they have bought every free agent star possible. Their payroll is about $153 MM, by far the highest in the league and more than 700 percent higher than the Tampa Bay Devil Rays’ 19.6M. If we calculate payroll dollars divided by wins for the season, however, the Yankees spent about 1.5 MM per win last year and didn’t win the series. The Oakland Athletics have, in fact, the lowest payroll cost per win in the major leagues (about $500K) for the last four seasons. Winning with a small budget is vital to drawing fans, getting to the playoffs and making money in small economic markets.

    How do the A’s do it? That is the subject of Michael Lewis’s new book, "Moneyball: The Art of Winning an Unfair Game" starring the manager of the A’s, Billy Beane and his new, more scientific, more consistently accurate methods for evaluating the true lifetime value of a prospective player versus their market price. Mr. Beane has, among other necessary attributes, a kind of Warren Buffet type value investing capability, but for baseball players and negotiated contract costs. If you would like to read a review on the book, go to Amazon.com; or, here is a URL for column coverage in the Boston Globe:


    What can Billy Beane’s baseball alchemy suggest to the average distribution location manager? Perhaps it can inspire us to rethink our business model around different strategic information that we must gather, interpret and share with all employees. Start with a simply sufficient profitability ranking of all of our customers. From such a ranking we could then do a number of new strategic productivity plays that will give us "more to the core by ‘04" math discussed in #5 and #6 below. If first time readers of these notions would like more information, you can check out the following articles at our site: #2.19, (2_19.asp) case study for 2.19, (2_19cs.asp) 2.3, (2_3.asp) 2.15, (2_15.asp) 2.16 (2_16.asp) and 2.18 (2_18.asp.

    There is, with few exceptions, no inherent advantage for being big in general product volume within a distribution channel, but there is a big advantage to having economies of inventory performance for a target customer niche’s one-stop-shop array of items (highest area fill-rates with best turn x earn economics). In a similar way, Southwest Airlines has always made a lot more money by dominating a route niche instead of having the biggest total sales volume in their industry. And, Grape Nuts with 3% share of the cereal market has always made much higher returns than Kellogg’s with its 40%+ share of the total cereal market.

    Every distribution location, whether it is an independent David up against a big chain Goliath or it is an under-performing unit of a large chain, has unique possibilities to re-define their geographic market into different types of customer niches that they can super-focus on to dominate and become very profitable. For more on selling everything to the right customers in the right niche, instead of selling a little of an ever-broadening product line to any and all customers, see topics #ed 5 and 6 below.


Will this wildly successful, best selling book help you to manage profit-improving changes in your business? Not by itself, but it is a start. Here is an email from a reader followed by my response:

Dear Bruce,

Did I detect a bit of a slam towards "Who Moved My Cheese" in DCC 21.1? I routinely forward your DCCs to my management team, often with my own comments and questions attached. Because we have all read and discussed Cheese as a management team with great satisfaction, I promised the team I would see what you really thought of the book. Any thoughts?

Joe Distribution Chain Exec

Dear Joe,

Yes, I read Cheese and I also read it to my children who were 12 and 8 at the time. We still use "Sniff and Scurry" and "Hem and Haw" as code words for the choices we have when uncomfortable change is confronting us. I must admit, though, that they much preferred the insights from Out Learning the Wolves another business parable book that my daughter elected me to read to both her 3rd grade (last year) and 4th grade class this year. Wolves describes how a flock of sheep overcome natural resistances to change and discover group learning skills to keep the wolves from preying on them. It takes the problem of dealing with change a few steps further than Cheese.

Cheese is a great vehicle for introducing some key philosophical verities about change in a simple, entertaining and motivating way. It is, unfortunately, only the very tip of the transition management iceberg for corporate change. There are clearly a lot more strategic insights and transition management skills and group learning tools that are needed to effect any kind of significant corporate change. For this reason, the benefits of Cheese may not get traction and eventual, sustainable, economic improvements for all stakeholders.

Another best-selling book that might take you a few steps further as to why your company might be a "good", but not "great" performer is "Good to Great" by Jim Collins. It is interesting to note that after 18 months the book "Good to Great" has finally made it to the number one spot on the May 5th Business Week Best Seller list for hardcovers. It’s a well written and researched book that distills seven key principles that 11 good to great companies used. Like all recipe business books, however, it is often a difficult stretch to relate the findings to a distribution business. So, I tried to bridge the gap and make better connections in several articles that I wrote starting in October ’01. You might skim those articles before deciding on whether you want to tackle the book or perhaps start management dialogue sessions using modules from our video "High Performance Distribution Ideas for All". Here are the article titles and URLs that go to my web site:"Good wholesalers to Great Ones – Quickly!" 2_14.asp ;"E=MC2 Measurements for Distributors" 2_16.asp ; "Why Aren’t Best (Distributor) Practices Happening? 2_17.asp

In summary, Cheese is a great book, because a lot more people will read it and discuss it than a more in depth, prescriptive book like G2G and taking a first step on a long journey is better than standing still. Cheese will not give you, however, new north stars, good map(s) or some of the new tire changing equipment you will need for successfully completing a transformational journey. Here is a logic statement meant to be a positive challenge for your management team: IF a group of managers can only muster enough intellectual energy to read Cheese as opposed to "Good to Great" as opposed to having a series of "dialogue sessions" about new, different and confrontational success assumptions for running a distribution company introduced by modules from my "High Performance.." videotape; THEN will the management team have what it takes to first invent, then use all of the transitional needs for a journey that involve enough collective, right changes to make an economic difference for all stakeholders? No business will succeed making lots of little changes that are the equivalent to refining the layout of the deck chairs on a company ship named the Titanic heading for an iceberg.

Hope this all helps to re-challenge your team to follow up on their Cheese change enthusiasm.

Sincerely, Bruce


  1. There are lots of helpful reviews on all three books –Cheese, Wolves and G2G - mentioned in this correspondence. If you would like to look at about three pages of summary notes on "dialogue" skills that I put together for a presentation on "transition management" go to www.merrifield.com Exhibits Tab and select "Dialogue Exhibit" that should be posted this week.
  2. Looking at the May 5th Business Week Best Seller list under "paperbacks", I noticed that "The Tipping Point"(what turns an idea into a hot trend) has not only gone from hardcover to paperback, but it is still moving up the list from #5 to #4 and has been on the top 15 paperback list for 15 weeks. I have been expecting and looking for the "tipping point" for the housing bubble to start deflating in the US as it has already been doing in Japan for the past 7+ years (see my 11-19-02 observations in DCC # 2.2.- ./2commentary.asp) Well, guess what book title declined from #6 to #8 after 21 weeks on the paperback top 15 list? "Home Buying for Dummies" (Gimme shelter-and a mortgage.). Is this book’s fading popularity a tipping point, a straw in the wind? How many sub-prime borrowers do you think are left without a house yet? In 2002, $2.5 trillion worth of mortgages were originated with about $250B of that being cash outs through mortgages and an unprecedented growth in home equity loans. Over $500 billion of those mortgages were "sub-prime". Below is an update blurb on the racquet activity that is going on in FHA approved housing for which buyers are supposed to have a 3% down payment that builders are legally forbidden to give to prospective buyers. The Nehemiah "foundation" is one of 600+ "charities" that have popped up by raising "charitable" contributions, mostly from builders, which then donate the 3% down payment to families that want to buy FHA approved housing. The 97% mortgages then come from "government sponsored entities"( Ginnie Mae, Fannie Mae and Freddie Mac). Who will eventually pay for all of the defaulted mortgage loans when housing valuations stop growing faster than income and the last-hired, first-fired, sub-prime crowd default sometime in the future? The blurb:

April 22 – BusinessWire: "The Nehemiah Corporation of California, the nation’s leading nonprofit provider of down payment assistance, today announced a series of new hires in key markets to strengthen the Company’s strategic national and local outreach program.

As Nehemiah’s new Area Managers, these individuals will be responsible for engaging current and potential industry partners in participating in Nehemiah’s down payment assistance program… To date, Nehemiah has provided more than $500 million in down payment assistance gifts, resulting in over $15 billion in real estate transactions and has helped nearly 150,000 families and individuals achieve their dream of homeownership." (Doesn’t that warm your heart?)


The number one problem for distributors from ’92 to ’02 was "finding and keeping good, new people". Well our chronically weak economy has pushed that old concern way down the list. A recent distribution channel survey, for example, was mentioned in DCC # 21.1 (21commentary.asp). A North American Wholesale Lumber Association (NAWLA) survey on member concerns found only 4% of respondents mentioned "labor quality" and 2% mentioned "labor costs".

This past week an interesting report by the Economic Policy Institute was reviewed in a 4-26 article in the New York Times. It reported that annual income decreased for ALL levels of income for 2002. (Here is the URL for the article: http://www.nytimes.com/2003/04/26/business/26PAY.html )

Here are some of the key, out-take quotes from the article:

  1. For the first time since the 1980’s, the average pay of workers at all income levels is falling…The inflation-adjusted weekly pay of the median worker fell 1.5%…the biggest drop (for the median) since the mid-90’s
  2. (one company) cut all annual pay above $30,000 by 10%…we are not having any trouble finding new people.
  3. (from people who have lost jobs) She is now making $8/hour – compared with $20 an hour at Nextel…..rather than one full-time job, I’m looking for three part-time jobs and hopefully one will have benefits
  4. For all of the reasons that companies cite for cutting pay (increasing health benefit cost sharing, layoffs) the biggest one is simply that they are able to.
  5. It took a long time (2 extra years) for the pressure of the full-employment economy to dissipate, but it is gone.

But, wait a minute, wasn’t that for last year; couldn’t the labor squeeze come back? Aren’t the economic experts forecasting that the economy is going to pick up speed in the second half after being wrong on the same call for the past two years? Isn’t the stock market up, because corporate earnings are improving? How about these latest economic data points:

  1. "Consumer Spending and Personal Incomes Rise in March". On 4-28, the Commerce Department reported that Americans saw their income rise by 0.4% in March (4.8% annualized!); (AND) they boosted spending by 0.4%, the best gain of the year.
  2. Yesterday, 4-29, the Conference Board reported that its index of consumer confidence leapt to 81 in April from 61.4 in March, the second largest gain since its monthly surveys began in 1977. The largest gain occurred in March 1991, after the end of the first Gulf War, when the index rose to 81 from 59.
  3. The unemployment rate, according to the Commerce Department, held steady at 5.8% in both February and March.

From a traditional budgeting and planning viewpoint, I think it is important to not be misled by government, Wall Street and even advertising dependent business media – all paid cheerleaders and spinmeisters – who hype the up-ticks of sawtooth trend lines that may be slowly descending on a smoothed out, trailing basis. We have to look for the more complete, integrated, economic information picture. Here are some additional data points to consider:

  1. For consumer spending, the overall smoothed out consumption trend is flat to down with ever smaller upticks when auto companies offer ever bigger zero-financing discount deals.
  2. April Wal-Mart sales, which are reported weekly almost real-time, are at the low end of expectations for April, so guess how all other retailers will do? The average spending for the first four months is down.
  3. As for consumer income, the same job year-to-year may have a .4% pre-tax increase for the wage component, but that raise does not include the effects of lay-offs, lower total compensation due to bigger reductions in incentive pay and higher medical insurance cost sharing, higher inflation or higher taxes.
  4. As for unemployment stats, the government only looks at new claims and those who are still receiving unemployment insurance to compute the unemployment percent. The people who’s benefits have expired are not counted nor are unemployed people who have stopped looking for jobs out of frustration or who are back in some sort of (re-training) school. In both February and March an average of 465,000 jobs were lost, the sharpest loss increase since the 9-11 layoff binge. The want ad index set another modern era low in March. In the past few weeks, plenty of corporate earnings announcements have claimed higher earnings on lower sales due to layoff savings with more future lay-off announcements being made. Jobless claims rose to 455,000 for the week ending April 19th.
  5. Both income and employment figures do not catch the lost income that occurs when a $20/hour job is liquidated and a person finds an $8/hour job. Both employers might be paying .4% higher for the wage component of total compensation for their remaining jobs than last year, but how does the re-employed person’s year to year gain look?
  6. A study by economy.com concluded that if you factored in those who "left the job market" and those who are under-employed, the effective comparative unemployment rate is about 12.5%. In a similar way, all unemployment figures reported by all national governments around the world are quite under stated; its good politics to do so.
  7. And, don’t forget that 3 billion other people in China, India, Russia, etc. have all been hooking up to the global free market system since ’89 to go after existing high cost, high regulated jobs faster than we can presently reinvent them. Wage deflation is being exported to the US just as we continue to have a final borrow to spend blow-off with the simple, unspoken assumptions that:
    1. Housing is a wealth-creating, productive investment that will continue to appreciate faster than incomes and refinanced, leveraged debt.
    2. Income streams are secure and growing; layoffs only happen to other folks.
    3. There will always be other trade-up housing buyers who will pay a higher price. No one would think of moving back in with their parents to create a lot more instant housing supply.
    4. As long as mortgage rates keep dropping towards zero the game will continue. Of course, if the rates level off or start to go back up, the game will be over and the law of gravity will start to bring housing values down. All of this comes out of an owner’s equity on a very leveraged investment that could become illiquid quite quickly.
    h. Growth in Europe and Japan has come to a standstill. China, the only growing economy on the planet, is currently taking a big SARS hit. Where is the global demand going to come from to get us all going again? Interest rates can’t be lowered anymore. There isn’t any pent-up, consumer demand in the US to stimulate.

All things considered, I believe that we are in for more of the same job-liquidating, slow 1.5% growth fueled by increasing debt by consumers and the US government for non-productive uses – cars, houses, transfer payments and military expense. For the second quarter, the US government is planning on selling $79 billion in bonds to finance debt spending in a quarter when a surplus is almost always achieved thanks to April 15th receipts.

What to do? It is prudent to have A, B and C contingency budgets ready? Instead of cutting or freezing across the board, we should trim our payroll costs strategically with new flexibility expectations for the survivors as we pursue new strategic customer-centric strategies. For starters, sort your employees into three piles: stars, steadies, wouldn’t hire again if given the chance. If budget downsizing becomes necessary, then more ideas are offered in topic #4 below.

BUT, I think that the average distributor is guilty of being too product, volume, financial and activity driven instead of customer profitability and customer niche oriented and has huge upside opportunities with fresh strategic alignment and employee productivity thinking. Now is not the time to indulge in defensive groupthink just to try to survive, especially when most other businesses are playing into a born-again strategist’s hand by all reflexively cutting back. All key employees and most steadies would be delighted to know that there is a way that will help both the company and them not just survive, but thrive. The mantras should be:
a. "Re-analyze to downsize, upgrade, refocus and revitalize". And,
b. "More to the Core by ‘04"
c. "Speed-to-high profits" (instead of the ‘99-’00 "speed-to-IPO")

If you want more ideas on strategic re-alignment and high performance opportunities, please skim through the past DCC’s that you might not have seen. And, our "high performance" video story is laid out on our home page at www.merrifield.com


In last week’s DCC #21.3 (21commentary.asp) topic entitled "Minnows Matter(?)..", we covered some ideas for strategic analysis before downsizing and making shape-up or out decisions on small accounts (minnows) that might be permanent money-losing, activity traps. We have since come across two other web documents that offer ideas on how to think about (re) budgeting, so without further ado here are the references:

  1. Al Bates, CEO of the Profit Planning Group – the distributor association financial performance study folks – has a recent article entitled: "Budgeting in Uncertain Times; A Plan for All Seasons". Here is one of the several URL’s at which you can find it: http://www.amtda.org/membership/profitreport.htm
  2. And to show a wonderful example of research serendipity using Google, I discovered another excellent article when I typed in Al’s title in quotes "Budgeting in Uncertain Times". The number one ranked hit is from the site with the most cross-links to it as an indicator of how valuable the document and/or site might be. The title of this second reference is: "The 10 Step Budgeting Process". Check it out at the following URL, because I think you will be pleasantly surprised at how elegantly simple, but thorough the suggestions and steps are. The URL: http://www.cen.org/Nov16CD/files/budget/10stepsuncertainty.doc


During a recent phone conversation with a client who is starting to have some real success with applying our video’s strategic productivity solutions, he asked what I thought the final math might look like for his business after he completed all seven of the productivity plays that can be derived out of the initial profitability ranking reports. To be honest, I had to say "it depends" on a lot of variables which we started to work through. Here is an outline for the discussion that evolved:

First, I started by citing before and after stats for a benchmark turnaround case that I engineered in the early ‘80s. Here were some of the before stats:

$7 mm in sales in a durable goods channel with an operating loss of about -$100k. 50 employees; 3000 active accounts spread over 4 locations; 15,000 stock keeping units for which the fill rates were about 82% based on a simple internal measuring system we developed. Errors were running about 40 per 1000 line items picked due primarily to a lot of warehouse turnover for the previous few years. The company was in a channel that served specialty contractors that would routinely buy from three suppliers on a regular basis to get all of the odds and ends they needed.

In 12 months time, we had:

  1. Quickly identified our 5 or so best, core accounts in our #1 historic niche and signed them up as "living edge directors" for each of our locations.
  2. We beefed our fill-rates for the core customer niche to get to an average rate of 92%, but with substitutions, etc, the effective fill-rates for the core customers were in the high 90’s.
  3. Reduced personnel turnover to negligible levels with a substantially new cast of higher paid, better screened, better work ethic people. (For the personnel systems and policies that were introduced see an overview article #5.7 at our site (5_7.asp); for six hours of audio tape from an all-day seminar on these systems go to ./products/view.asp?id=5.
  4. We cut errors to less than 10 per 1000 on our way to less than 5, and we were already guaranteeing zero errors and heroic recoveries with discount coupons for our "A" strata (outside sales coverage; more than $400 in GM$/month).
  5. We had been team selling the next 5 to 10 best target accounts in our #1 niche at each location for anywhere from 3 to 6 months with excellent results starting to happen.
  6. We turned approximately 50 potentially good accounts from huge small order abuser/losers to marginally to sensationally profitable accounts.
  7. We segmented and re-served, re-priced and re-termed the bottom 2000 small accounts. Many had actually been requested to stop doing business with us. Active accounts had dropped to about 1500 in 12 months and would continue to drop to about 1000 before they would start to rise again due to new branch openings.
  8. We hit an annual run rate in sales of $16MM, more than double, with a 3% operating profit margin that would rise to over 5% in three years time as the transformational expenses abated and high performance economics became more finely tuned.

As we tried to assess where the $9MM in extra business came from and why, here is what we concluded:

  1. The additional sales came substantially from less than 200 accounts in our #1 target niche spread over our 4 location markets. These were about 6% of the original 3000 nominally active accounts.
  2. Our top 20 core accounts in which we thought we were getting the lion’s share had grown by 35% on a year-to-year basis. After that they started to grow at more normal industry rates.
  3. We figured that we picked up a quick 10 to 15% sales gain out of our target niche by beefing up inventory for that niche. We got the incremental investment dollars from reducing excess stock and dead items, first on a remedial basis and then on a preventative basis. Our average order size, lines/invoice metrics and order fulfillment people productivity all increased by 100%, because of higher fill rates, a comprehensive small order program and less errors required less people.
  4. Our top 20+ target accounts had also increased by about 30%, because of both our improved fill rates and our aggressive, full-team, heroic pro-active service. These accounts continued to grow by 20 to 30% for a few more years as we ascended to become the number one, predominant supplier for most of them within 1 to 4 years of targeting them.
  5. We got much the same growth results from the next 160 accounts that we did from the targets due to better fill rates and the fact that our distinctively superior service kept what we had and attracted what the competition inadvertently drove away with their inadvertent mis-servicing.
  6. Our personnel productivity measured by GM$/employee went from about 75% of the industry average to 150% of the industry average, a double, in one year’s time. It continued to climb and level out in 4 year’s time at 200% of the industry average.

I could go on. Suffice it to say that if a distributor has not scientifically, systematically measured and managed the opportunities that come out of customer profitability reports, they have a possible upside over a 1 to 4 year period of:

  1. doubling sales within their #1 niche
  2. Reducing their active account base to perhaps halve of what is if they have been accumulating any and all customers. Don’t let the customers pick you, you should pick the ones you want. Don’t sell a little of something to everyone, sell everything to someone, especially with a superior growth future.
  3. Improving personnel productivity by 50 to 100% and operating margin rates by 3 to 6x what it has historically been if a distributor is starting out in the bottom 90% of the financial performance pool of distributors for their channel.

The "it depends" factors includes things like:

  1. How weak the economy remains.
  2. The strength and momentum of the other most serious competitor is for the #1 niche.
  3. How well the company embraces and executes all of the high performance assumptions, plays and policies.
  4. How sick and weak the company is to begin with. The benchmark case was quite operationally weak as was the unfocused competition.
  5. How high the switching costs are for potential customers between their suppliers. They were low in the benchmark case, they are very high, for example, in both the contract industrial pipe-valve-and-fitting and retail drug distribution channels.

Enough! Take the first step, read the articles reference in # 1 above, figure out how to rank customers by profitability and act; there is big upside for all of your stakeholders to be had.


One common point of disbelief in the MORE TO THE CORE math explained above is: "Not all distributors can do this, doesn’t the first mover, innovator win over the rest?"

I would answer that in most channels, there are more customer niche possibilities for more distributors to be excellent in then most would think. If you sub-divide traditional industry customer segments by both selling mode (A,B,C,D) strata and by how customers want to buy (friends, value, and pure price), there are more niches (for more on this sub-dividing and targeting process see DCC #18.2 18commentary.asp and 21.2 21commentary.asp).

Think of the opportunity for competing distributors in terms of decatheletes. These competitors are good, but not great at 10 different track and field events, because there are physical trade-offs at work. If you have a lot of muscle for being great at the weight events you will do poorly at the distance running and high jump where extra upper body weight is a detriment. If one distributor sells lowest total procurement cost, custom systems to large, complex accounts, they don’t need all of the extra service support overhead to sell cash-n-carry, help yourself customers.

In the benchmark case in #5, where did the 2000 former active accounts go? They were sent back to other distributors that were better tuned to take care of them at a profit. From which competitors did the case company take $9MM on an annual run rate? Probably all of the others who were also blissfully selling some products to too many customers, with an extra big hit to the other largest natural share competitor for the target niche. There was more often than not a win-win trading of accounts that was going on with better service value for the targeted customers.

We know from the Profit Planning Group study of distributors in 40 different channels that the top 10% make on average 3 times the pre-tax return of the bottom 90%. We can also assume that in most channels there is probably about 30% excess capacity for distribution capability – too much inventory, too many sales reps, etc – in any given channel market. My intuition is that about 6 out of the 9 firms that are in the bottom 90% pool could improve the economics for all of their stakeholders if they focused on one niche at a time for which they could provide a distinctive, low-cost, high-value service offering. And, the other 3 distributors would be niched out of business.

My advice to any one distributor is why should you care about the other product-centric, volume, activity oriented distributors? Pick your number one historic best niche and reinvent yourself to own it for superior results for all of your stakeholders and let the other competitors figure it out for themselves. In track and field you can win gold for being good in 10 events, but in the world of business, the gold goes to the distinctively best performer for each individual customer niche.

That's all for this week.