May 21, 2003 - Distribution Channel Commentary (DCC) # 25

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THIS WEEK’S TOPICS:

  1. "GOOD TO GREAT" DISTRIBUTION RESULTS IN 14 ANNOTATED SLIDES
  2. "RE-INVENTING YOUR CORE BUSINESS" (A WHITE PAPER DRAFT)
  3. REBATE ROT III; STOP PRODUCT PUSHING, START CUSTOMER PBIT PLAYS
  4. MIGHTY AMAZON – GOOD ARTICLE PLUS COMMENTS
  5. "BRUCE, WE ARE CHOKING ON TOO MANY GOOD IDEAS FROM THE VIDEO"
  6. ECONOMIC STORM FRONTS WILL COLLIDE (?); CALIFORNIA EYE LEVEL REPORTS
1.  "GOOD TO GREAT" DISTRIBUTION RESULTS IN 14 ANNOTATED SLIDES

I have been working hard for two years to articulate how mediocre, mature distribution companies can make the transformation to high performance economics for all stakeholders and not have to participate in the pain of the on-going post-bubble economy. How do you make the complex, simple enough to work? How do you take the story not just to CEOs, but eventually to all employees who must be part of the solution or they will be part of the problem? Is it really possible that 7 out of 10 distributors in the same business can all strategically refocus and improve?

Well, I’m excited about the latest attempt at these problems. I encourage all readers to click on the "slide show" button on our site, download and print the PDF file of the annotated slide show entitled "Good to Great" Distribution Results" and tell me what you think. I’m especially proud of reinventing the butterfly economics (or bow-tie) diagram that you probably all have seen in # 4. The entire slide show is a blue-print for the book that I will crank out this summer for mid-September publishing.

2.  "REINVENTING YOUR CORE BUSINESS"

I don’t know how many of you might have noticed that I sneaked in at the end of last week’s commentary a blurb/offer on a "rough draft on strategy chapter". The truth is that I was still knitting it together and editing it, but now it is in a useful, ready to e-mail form. Here’s what it specifically covers:

  1. 11 questions/discussion points plus commentary for any distributor to re-think how they are currently competing and operating. Underlying assumptions are that if we are working harder and doing less well, its time to do some serious re-thinking about our (un)spoken success assumptions. And, how are we going to do a lot better (big gains) without making some big changes?
  2. 9 pages of detailed, how-to, often new ground-breaking suggestions for accomplishing two main, related objectives:
    1. "Rethink, downsize, upgrade, refocus, revive and grow"
    2. "More to the Core by ‘04"
    3. Four case studies that blend the emotional resistance to embracing and changing with the concepts covered.

This document is guaranteed to be the most densely, intensely strategic how-to tool for distributors in existence that is for free. Just email karen@merrifield.com and say "send the strategy paper".

3.  REBATE ROT III; STOP PRODUCT PUSHING, START CUSTOMER PBIT PLAYS

We have been tracking the inflated profits scandal at Royal Ahold’s US Foodservice subsidiary in past DCCs (14.2, 15.3) 14commentary.asp & 15commentary.asp. Here is the latest followed by some comments:

  1. (May 8) Instead of a $500MM over-statement of profits, it looks like the fraud was actually more like $880MM spread over three years from April 2000 to December 2002.
  2. It appears that honchos in Holland have decided that fish rot from head down or at least the CEO and CFO should have been able to do some simple math to know something was wrong a lot earlier than reported. The top two officers have now been dismissed.
  3. As the SEC regulators and accounting specialists have dug deeper into vendor rebates, they have found that: there is enormous volume and diversity of kick-back, volume-buying deals. For super-markets vendor rebate money is running at 5.5 to 7% of sales.
  4. How to account for all of the types of deals and the timing of them is problematic for all parties involved, including the audit firms.
  5. Wal-Mart doesn’t get any, because they are wasteful. They just want the lowest total procurement cost which includes the lowest, everyday price and re-engineered inter-company processes so that their fill-rates stay at the highest in the industry with the lowest every day prices.

COMMENTS:

  1. The rebate fraud by US Foodservice was the symptom of both the industry practices and pressure to shoe ever rising profits to support stock market bubble: acquisition prices, earnings per share, stock prices and management bonuses and stock option appreciation/exercise activities.
  2. All of the aftermath effects of the stock market bubble build up are far from flushed out. Plenty of publicly traded distribution companies still have "goodwill" on their books for overpaying on bubble era deals that need to be written off. Acquisition companies that cashed out the veteran management team to then install new management talent from outside of the industry have plenty of operational turmoil that will guarantee deteriorating their internal service retention feedback loops for some time to come. Past DCCs have documented how McDonalds is losing share to Wendy’s and Home Depot to Lowe’s because the former #1s brought in outside bean counters and efficiency experts who proceeded to ignore service excellence basics and retention economics.
  3. The product volume rebates put more emphasis on the 100 year old, out-dated models for: doing product-push marketing; and managing a business with financial numbers in pursuit of greater volume for greater economies of scale that don’t exist (with very few exceptions)in distribution channels. Did you know that the "Dupont Profit Model" for maximizing ROI was invented in 1915!
  4. When will distributors learn that if they really want to grow faster than their industry on a profitable basis and earn more rebates because of it that it will be customer-centric strategies that happen to grow product volume as a happy by-product of selling a one-stop-array of items to the right customers (not all) within one niche of customers at a time?
  5. Speaking of fraudulent behavior and customer centric strategies, I was intrigued to see that Mr. Virtues’ (William Bennett) gambling habit expose surfaced the following segmentation system for different strata of gamblers on the Las Vegas strip:

Free parking ………… for anyone who enters the casino

Free drinks………… for " " plays

Free buffet…………… for playing $10/hand for one hour+

Free coffee shop……. for " $25/hand for one hour+

Discounted Room, 2 nights for " $35/hand for 8 hours+

Free room, 2 nights for " $50/hand for "

Premium Suites for " $500/hand for "

Private Jet, penthouse for " $5000/hand for "

I wonder how many manufacturers and distributors have really figured out how to segment customers within a given niche and service, price, rebate them differently in a way that works. Maybe it is time to do so before someone who knows how much profit they are making per customer and what their true costs are takes your cream and leaves you with the dregs.

4.  THE "MIGHTY AMAZON" – GOOD ARTICLE PLUS COMMENTS

I get a free coffee mug from Amazon every Christmas, because I’m such a big customer. My web site was one of the first 1000 Amazon re-sellers back in 1996. I have always been a huge fan of their burgeoning offerings and perfect service, but I assumed in 2000 that they would not make it financially. They had over-expanded warehouse capacity and taken on $2B+ in convertible debenture debt from which I thought they would never be able to service given continued losses on rising sales volume.

But, I was wrong. Jeff Bezos has lead a non-stop service innovation effort to the point where they could now be hugely profitable sometime in the future. As for the debt, Warren Buffet owns $459MM of their bonds and raves about the company and the investment.

There is a fascinating latest, cover-story read on Amazon in the May 26th issue of Fortune entitled "Mighty Amazon". Here is the URL: http://www.fortune.com/fortune/ceo/articles/0,15114,450893,00.html

Here are some of the points in the article that spoke to me:

  1. What is it like for 8000 employees to work at Amazon? "Call it the Amazon way: project an image of fun, but inside, hire smart, drive fast, and above all, bet on the numbers. How’s customer service doing? Bezos isn’t interested in a qualitative answer. He wants to know (lots of service operations metrics listed)" Bezos is quoted: "With most decisions, you can do the math and figure out the right answer, and math-based decisions always trump opinion and judgement…(don’t) make judgment-based decisions when data-based decisions could be made"
  2. Comment: You can’t work hard if you aren’t having fun, believe in what you are doing, getting measurably better and know that there is something measurably in it for you. Internal service improvement "games" with good score-keeping under-gird such performance environments.

    Amazon has developed all of their own internal service metrics that allow them to continue to improve value for customers which in turn allows them to continue to retain and sell more to both old and new customers. Distributors are typically dependent upon the "business intelligence" software applications from their general system providers. These BI modules are woefully weak on service excellence and customer centric retention measurements, because the distributors don’t ask for them and then wouldn’t share them with all employees anyway. What percent of the 97%+ of all US distributors that don’t even share general financial numbers with all employees will ever request and share better BI capabilities, general financial numbers and gain sharing incentives with their employees as Amazon does? For more on what and how to measure leading-edge, profit-power, service and customer metrics that cause lagging financial symptom numbers to improve see our website articles # ed: 2.16, 2.18; and video modules # ed: 4.1 to 4.9 and 5.3-4.

  3. "If Bezos can’t get an answer from one of his senior executives, he’ll micromanage his way four levels down the hierarchy." He says: "I’ve not seen an effective manager who can’t spend some fraction of time down in the trenches. If they don’t do that, they get out of touch with reality.
  4. Comment: I agree! CEO’s need to have bottom-up service process metrics, anonymous survey results on employee morale and employees’ assessments on the effectiveness of their bosses in order to attract, keep and keep motivated front-liner service providers. Branch and middle managers with big ego/power needs who like to play politics and take credit for good stuff while fixing blame on others have no place in high performance distribution environments. They must either grow up or get out. In a gentle way, our "High Performance…" video touches on these points and the need for anonymous surveys in modules # ed 3.15 and 5.6.

  5. Bezos is obsessed with innovation. "One of Amazon’s most prestigious in-house awards is called a Just Do It. The winners are employees who do something they think will help Amazon without getting their boss’s permission. It has to be well thought through, but it doesn’t have to succeed. There are risks to rewarding such behavior, but the cure – to encourage people to always ask for permission – is worse than the disease".
  6. Comment: Top 3% performing firms are all perpetual innovators that are constantly reinventing and expanding value for their target customers. To encourage people to make good mistakes to fail-forward to greater levels of performance and customer value, there are pre-requisites that are necessary. Numbers have to be shared so that target input goals that will deliver better financial output effects can be measured. Employees have to know what is in it for them if they should put in more time, study, creativity and risk. And, they have to know how to "push the wheel of learning" to design good experiments that lead to both upside discoveries as well as "good mistakes". For more on these ideas see article # ed 5.4 as well as the entire video for all employees, but especially modules #ed 5.7 (wheel of learning), 5.8 (make good mistakes) and 5.2 (publish praising statements – especially for good mistakes – for everyone).

  7. Amazon pays the most to hire the best at every position to then expect a lot. Here’s a quote on the interviewing process: "At most companies, references are an afterthoughts. At Amazon they sometimes matter more than in-person interviews. And after eight years, the company still uses the same list of 23 questions Bezos created to do reference checks when he started the company. An example: "Is this person one of the best people you’ve worked with?"
  8. Comment: Paying more to each individual to pay less for the total payroll to get more total effectiveness and innovation is what GE, FedEx, UPS, LL Bean and pretty much every top 1% performing company has been doing for some time. For more on re-thinking all of your personnel systems see slide #8 in "Good to Great" Distribution Results under our site’s slide show button.

  9. "Today, Amazon’s warehouses can handle three times the volume they could in 1999…there just aren’t other companies that let a consumer order two (or more) out of millions of products in a warehouse and then quickly and efficiently, at low cost, get those things into a box.

Comment: Amazon like all intermediary businesses has to build their strategy on "total procurement cost, butterfly economics"(for more on this see slide # 3 in the slide show mentioned in #1 above) and basic service brilliance – ease of site use, one-stop-in-stock fill-rates, speed and accuracy. All of Amazon’s technology would be for naught if they didn’t first have basic service excellence and TPC economics.

5.  "BRUCE, WE ARE CHOKING ON TOO MANY GOOD IDEAS FROM THE VIDEO"

I recently got a call from a CEO of a regional distribution chain in a durable goods channel (more than 10 locations; 350 employees) who has bought 7 copies of our "High Performance.." video so far. He has been going through all of the modules; first with his management team and then in parallel with all employees at some initial locations.(They started with the first module and have progressed through 38 straight modules which is # 4.10 for users familiar with the product.)

Here was his problem: they love the tapes, moral is up, #s are up in a down channel, because they must be taking target business from the competition, but they have so much yet to do on what has been covered that they need to stop and regroup. The big questions were: "Should we stop our weekly rhythm for doing the tapes? And, what should we do to go back and do all of the previously covered ideas more thoroughly?"

Here were my recommendations:

  1. When a CEO and then a management team are going through the video modules to discuss and comfort zone all of the changes that will be necessary to go from good to great, it is OK to stick to a weekly schedule. Each management team will have to choose its own path through the 53 modules that were organized from beginning to end with front-liners in mind. Most users have found that the digestion process takes longer than imagined, because some modules evoke more resistance and discussion than imagined or spark some immediate analytical studies to confirm that certain opportunities or problems really exist.
  2. All management teams should first skim through the last section, modules 5.1-13, which are change management ideas and methods that could be used on a retroactive basis to revive any past change initiatives that might have sputtered out.
  3. Once a team is ready to take the educational, transformational story to all employees; the curriculum schedule should be a flexible one to allow for what should we do now follow-up ideas to be worked on. I suggested to this chap that he go back and review all of the modules to look for unfinished work and prioritize it. Then, jump ahead and start to review the section 5 modules with all employees starting with modules 5.2, "praising statements", 5.7 "push the wheel of learning" and 5.8 "make good mistakes". Because no progress can happen without raising new, unforeseen problems and trying new things unsuccessfully the first few times (like first riding a bike), we need a common learning philosophy and tools to help us get over our corporate, if not individual, learning disabilities.
  4. Many of the ideas in the video will require that new information be captured, calculated and reported that the indigenous information system may not readily provide. So, think of two metaphors: peels of an onion from the outside in for information. And, new bigger shells on a growing lobster when doing implementation efforts. For information analysis, what can we do on a first peel, quick-and-dirty, approximately right analytical basis to get a new level of insight? What can we perhaps have a few months down the road to do the next level of improved analysis on our way to some ultimate, wouldn’t it be great strategic information database capability?
  5. As for the lobster, he’s happy until he has to go through a passage process to get to the next bigger shell, hopefully without getting eaten. When we decide to try to reduce errors, improve fill rates, manage a sub-group of small order customers, etc., how can we break the challenge down into smaller bites and go for first order improvements, then a next level. If you start to teach an eighth grader how to throw the discus, you don’t start them off at the back of the ring doing a 540 degree spin move. You start by standing still at the front of the ring and seeing if they can release the discus out of their hand with a clockwise spin (if they are right handed).

  6. Through it all it is important to have new strategic alignment north stars or metrics that keep everyone moving in the same rough direction with an optimum amount of creative tension, improvement expectations. Alignment information includes:
    1. A definition of our number one niche and strata of customers personified by the 5 most profitable core customers that we already have in that niche (at each location)
    2. 5 or so best target accounts in the same niche.
    3. The current and target levels of service metrics for the target niche as best we can measure them (peels of the onion improvement process for service metrics).
    4. 12 month trailing gross margin $/ employee that improves all stakeholders’ futures as it rises.
    5. PBIT/customer per strata that increases towards a healthy optimum for each strata that we choose to pursue.
    6. Hope this helps other video users to stay on the path towards high performance!

6.  ECONOMIC STORM FRONTS WILL COLLIDE (?); CALIFORNIA EYE LEVEL REPORTS

California possesses the fifth largest economy in the world. Its output of goods and services exceeds $1.3 trillion or about 13% of the US’s economy. It is also the epicenter for the housing bubble, state deficit measures and mounting lay-offs. In an effort to raise revenue the state has jacked up the workers comp. insurance rates. One distributor has seen his rates double per employee over the past year and is expecting them to go up again this summer. He is currently spending $500 per month per warehouse person in an environment for which they have never had an accident. The CEO would gladly pay a huge deductible to reduce the cost, but can’t because 100% insurance coverage is now mandatory. As a result, employers are leaving the state.

  1. Job creation dynamics could become an even bigger problem for California. All states, including California, were good, net job creators until late this past year. Now the announced layoffs for most states is rising with their deficits. So, what will the newly unemployed do? No problem, they will just refi on their ever-appreciating houses like Linda Lutz has below.
  2. May 11th – Los Angeles Times: "The hillside house Linda Lutz has lived in for 25 years isn’t only her home. It’s her bank too. The character actress has had little work in recent years, but she has been able to cover her expenses by cashing in on the equity of her house in Encinitas in northern San Diego County. In September, Lutz refinanced for the sixth time in five years, taking out $100,000 ". . .every time I thought we had tapped out, the property value increased again…without refinancing", she said, "I would have been out on the street"

QUESTIONS TO PONDER:

  1. How long can home values increase faster than the incomes of the people who buy them and live in them?
  2. What happens to Linda’s game when mortgage rates finally bottom or perhaps go up?
  3. What happens when the guy who wants to buy a house decides he can’t until he first sells his old house that won’t sell because the guy beneath him who wants to trade up can’t sell his?
  4. For the past two years the economy has grown slowly on the back of consumers taking out ever lower interest cost loans for autos and houses or on their behalf by the state and federal governments borrowing to finance consumptive activities. Debt of all sorts has grown faster than the consumption based GNP; how long can that go on?
  5. What happens when more factory and government lay-offs occur? Can we fire our way to sustainable profitability or are lay-offs a one-time fix? How do these people make their monthly payments?

Our global economy has big challenges ahead. It is time to move to high performance service/distribution ideas to capture huge increases in productivity and profitability to greatly offset the general negative currents of the post-bubble economy.

Back again next week!

 

Bruce Merrifield

Bruce@merrifield.com

919-933-7474