May 28, 2003 - Distribution Channel Commentary (DCC) # 26

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THIS WEEK’S TOPICS:

  1. "REBATE ROT" SOLUTIONS: FEES FOR SERVICE (?)
  2. SURVEY: "WHO HAS THE CHANNEL POWER"? ANS: NO ONE THINKS THEY DO! (?)
  3. McD’S COME BACK BASED ON BASIC SERVICE EXCELLENCE (?)
  4. IT, DOES IT MATTER OR NOT? YES!
  5. LIP PIERCINGS AND CUSTOMER VALUE: UNIONS, BLIND MEN AND ELEPHANTS
  6. OUR ECONOMIC DOLLAR MATRIX IS RE-LOADED; NOW WHAT?
  1. "REBATE ROT" SOLUTIONS; FEES FOR SERVICE (?)

Regular readers know that I have been following the Royal Ahold/US Foodservice inflated profits scandal starring supplier rebates that run in excess of 5% in the food channels. (See past DCC topics # ed: 14.2, 15.3, and 25.3)14commentary.asp, 15commentary.asp, 25commentary.asp. Well, I was delighted to get an e-mail from my good friend, brilliant distribution channel guru and writer, Dr. Adam Fein along with a hot-link that Adam gave me permission to share with you.

In 2 ½ pages, Adam’s "Opinion: Rethinking Rebates" piece points out that rebates are a "blunt tool" used by manufacturers that often get competed away or forcefully passed through to powerful end-users. Distributors might consider, instead, fee-for-service pricing which is becoming common in some channels. I recommend checking it out at: http://www.pembrokeconsulting.com/News/RethinkingRebates-March2003.pdf

    2.   "WHO HAS THE CHANNEL POWER?" SURVEY: NO ONE! (?)

Speaking of Adam, he is starting to work on the next "Forces of Change" study for the NAW’s Distribution Research Education Foundation (DREF). But, there is still gold to be mined out of his last study published in 2001. Here, for example, is some reading between the lines for one of the survey questions included in the 2001 publication. On pages 72-74, there is a discussion on "the power of the customer will continue to increase" (in wholesale distribution channels). What is interesting to me is that when asked who was "the most powerful" in their channel, the results were far ranging and each player – manufacturer, distributor and customer – saw themselves as the least powerful of the three!

What can we read into these three "I’m least powerful" views:

  1. If we separated manufacturers and distributors into two sub-groups, the bottom 90% and the top 10% based on pre-tax return on total assets and asked them who has the power, I’ll bet the top 10% would have much higher ratings for their channel power. In fact, the top 3% who outperform everyone else by being perpetual value innovators for their customers and co-creators with their best suppliers would think they had the most power, because they do. Everyone wants to do business with a company that is growing 2 to 5 times faster than their industry on a sustainable, premium profitability basis.
  2. The more clearly any company in a channel can define, measure and execute their unique marketing proposition ("UMP") for their target customers, the more "power", profits and strategic possibilities they will have.
  3. If we re-phrased the question to "how important is it too have the most power in a channel?" for the top 3% of all of the firms each with their UMP, we might find out that the question would be irrelevant in the sense that all channel functions are needed. How can you not have power, if the channel couldn’t exist without you, and you are the best value innovator in your position? Most companies might envy a channel powerhouse like Wal-Mart, one of the great perpetual innovation machines of all time. Since we aren’t them this time around, perhaps the question should be: how do we innovate to partner companies like them successfully? Wal-Mart has plenty of suppliers that have made big bucks partnering with them, and Wal-Mart, being on the reciprocal side of the relationship, is, no doubt, glad that those suppliers are doing what they are doing.

Want some proof about how power can shift to a distributor that can better define and execute a best total procurement cost proposition for a given niche of customers? Iin one day in the early '90's, I did several in-house presentations for a distributor in a contractor supply channel. It was capped off with an evening seminar for their best contractor customers. This company had bought our "Understanding the Dynamics of Distribution" video in ’86 and went on to do a brilliant job of achieving and selling "basic service excellence" that reduced the customer’s "total procurement cost". Here’s what some customers and a supplier had to say in response to an informal survey I did before the evening seminar:

Customer #1: "I told (the CEO) that I was getting tired hearing about how great his company’s service was. He could stop the (automated reminders) already. I got the message, I was giving him all my business, because - the truth be told - my installers’ productivity had risen so much because we had such high effective instant availability of product delivered here just in time. I’m actually a bit amazed at their service guarantee, there is no way that we could currently do a similar money guarantee for our customers, but we’re having team talks about it. That’s one of the big reasons several of us are here tonight for your seminar.

Customer #2: "A few years ago, before they started their big service excellence program, I could always goose one of their people for some extra concession. Now they have actually gotten a bit arrogant. I’ll try to play the last-look, meet-the-price game, and they don’t flinch. Instead, it’s like I pushed a button to get an automatic recording: they all say something like 'you can always find a lower price, but we are the best total value, so just give me the order and be happy’. And, I do, because they are generally right, but it isn’t as much fun as it used to be. I wish one of the competitors would close the (service value) gap, so I could have some more power again."

Supplier rep: "To be honest, there are a number of minor distributors in this marketplace that I don’t even call on any more, because these guys are capturing all of the new growth in the market and taking share from the weaker guys. I figure that I should spend all my time selling my line through them, because they are going to get the business sooner or later anyway. It actually makes my job easier." 

If any distributors would like some ideas on how to re-think and recreate their total, unique, value proposition for one niche of customers at a time, here are two instant resources:

  1. Check out the new slide show that will be posted within 24 hours at our website entitled: A Distributor's Total, Unique, Product-Value Proposition(slideshows.asp

    2. Request via e-mail our "strategy paper" from karen@merrifield.com

  1. McD’S COMEBACK BASED ON BASIC SERVICE EXCELLENCE(?)

Regular readers know that I have been making a service excellence case out of McDonald’s decline. I peg this to the cessation of HQ’s measuring of basic service metrics at all locations (company and franchisees) around ’92 (see DCC’s 9.1 9commentary.asp, 15.2 15commentary.asp). Well, McD’s made the lead article in USA Today’s business section on 5-21-03 which was entitled "It’s Back to Basics for McDonald’s". A former, retired Vice-Chairman of the company, Jim Cantalupo, has been brought back as the turn around CEO. Here are some excerpts with comments:

  • "A humbled McD’s announced its first ever quarterly loss in January. Same store sales in the USA fell for 14 consecutive months before finally eking out a small gain in April. Its stock recently slipped to its lowest point in nearly a decade. Standard and Poor’s just downgraded its corporate credit ratings. And in a national survey last year of 50,000 consumers, McD’s ranked dead last overall among all 70 top fast-food chains measured." (The facts speak for themselves.)
  • (Cantulupo’s plan to revive the chain?)… "bringing back the rest of the McDeal: clean restaurants, hot food and fast, friendly service…in his view, if the basics aren’t fixed nothing else matters…. Just a small improvement in that execution, he estimates, could bring in $3 billion in new sales. A big improvement could result in many billions more. And once the basics are fixed, McD’s can really start cooking again, he says."

Comments: Sounds like Cantulupo is a believer in retention economics – people, service, profits – and that the augmented product starts with quality products, then service basics with other stuff then added on if strategically appropriate, and I think he is right. Now his problem is how to get legions of alienated franchisees, who have either lost the service excellence religion or are new since ’92 and never had it, to:

  1. buy into the benefits of employee/customer retention economics; and then,
  2. get all of their employees to become part of a re-born service excellence culture.


If Cantulupo was a distribution chain executive with a lot of mediocre branch managers managing the financial and asset numbers with undifferentiated service quality, our video, "High Performance Distribution Ideas for All" could help him a lot, but he’s not. He has a huge execution challenge ahead.

4.     IT, DOES IT MATTER OR NOT? YES!

In Kevin Maney’s 5-20 column in USA Today’s business section, he touches on the issue of whether infotech is a strategic advantage anymore. Here’s are some excerpts followed by a comment:

"But these days, great technology is cheap and plentiful, and every company has its share. So, IT doesn’t matter, because it’s no longer a strategic advantage. It’s essentially a cost of doing business……In the market, IBM is increasingly winning the customers willing to take a risk on technology that might bring a strategic advantage, and Dell gets all the rest (because they are the low cost provider for something that is just a cost of doing business)."

The column is short, clever and provocative, so its worth a total, quick, read at: http://www.usatoday.com/money/industries/technology/maney/2003-05-20-ibm-dell_x.htm

But, here are my thoughts as I think about distributors, their information systems and their software vendors:

  1. Most distributors have pretty slick, totally-tuned-to-their-type-of-distribution information systems. There have been lots of software vendors that have focused on distributor needs by the channel for a long time. There are few, if any, big refinements that can be made to these systems to improve the efficiency of individuals or departments. The "user groups" requested all of these obvious opportunities a long time ago. In fact, the biggest opportunity left for today’s distributor systems is for distributors to get better quality people, keep them longer and educate them better to use the information tools that they already have. I would estimated that the quality and upside potential of the existing software tools exceed the quality of the crafts-people using them in over 90% of the distribution firms in the US. People upgrades are needed more than software upgrades.
  2. Because most distributors don’t know what their strategy is from a customer-centric profitability and service excellence value viewpoint, there is a huge shortage/opportunity for in-house systems to deliver strategic performance information (SPI). To outline the potential of this "next great frontier" in IT applications, you might skim through two of our documents. First, check out the slide show on our site at Good_to_Great_Distribution_Results.pdf. Slide #2 tries to explain that without defining the right strategy first, a company can’t get any "strategic efficiency or effectiveness". The rest of the slides are quietly asking for new SPI for achieving high performance economics and satisfaction for all company stakeholders. Then, request (THE HIGHLIGHTED VERSION OF) our "strategy paper" from karen@merrifield.com to see a number of nitty-gritty strategic performance information needs for running any distribution business better. For a few interested software vendors, I highlighted passages in our 23-page strategy paper that require new levels of SPI support.
  3. Even though some software systems offer applications for ranking customers by profitability with simple and complex activity-based costing methods, most distributors don’t use them or know what to do with them. Some software systems offer "business intelligence" packages that capture and/or could helpfully format over 50% of the SPI a distributor would need for measuring and achieving a best total service value proposition, but very few distributors even know it, let alone use it. If users are already guilty of under utilizing their system’s operational potential (topic a above), then it is less likely that they will use SPI. What’s the real message hidden within Kevin Maney’s column? It is that there are always more opportunities to use both old and new IT applications to run companies better. What is missing in all but 3%+ of distribution firms is the imagination to rethink core business activity and the will to try some simple experiments to start moving towards high performance service economics for all stakeholders. Our video, these commentaries and our strategy paper are all geared to help the high performance transformation of any distributor that might be ready.
  1. LIP PIERCINGS AND CUSTOMER VALUE: UNIONS, BLIND MEN AND ELEPHANTS

This past week I came across two business stories in which a union mentality is undermining the very futures of the workers they are trying to "represent and protect". In one case, US Airways’ pilots union is protesting the carrier’s recent order of too many of the wrong kind of regional jets.(Wrong for total pilot jobs paying more, right for where and how customers want to fly and pay.) In the other case, Whole Foods had a first store successfully unionized in Madison, WI. They unionized because some workers had flaming hair colors, political pins and upper lip piercings that fell outside the boundaries of one of the most lenient dress codes on the planet. (Is offending customers the path to riches for union job holders?) In case you are interested, here are the best articles on each case: For the Whole Foods article: http://www.nytimes.com/2003/05/24/business/24WHOL.html?ex=1369195200&en=a00ef31b95f9e186&ei=5007&partner=USERLAND

For the US Airways article: http://biz.yahoo.com/rf/030523/airlines_usairways_pilots_1.html

Comments: The two cases are dis-similar in the sense that US Airways is a twice bankrupt airline with an uncertain future largely because of past union costs and work rule inflexibilities. Whole Foods, on the other hand, is one of the outstanding, heretofore, union-free, fast-growing, high-performance, high-employee commitment, great-service stories in America. They are similar in that in both cases unions are arguing for short-term, optimization issues for the employees that will directly undermine the perpetual customer value innovation that all companies must pursue to achieve best, sustainable, long-term economics for all stakeholders.

Based only on what I have read in the media, I was disappointed that "official spokespeople" didn’t talk about how it was important that all employees work together and sacrifice some of their personal, short-term needs to insure viable customer value creation to insure their own and other stakeholders longer term needs. It seems that the union, the employees and the management are all blind men looking at different parts of the commonwealth, company elephant and no one group wants to understand that the customer is the rider or what direction the customer wants to go on the elephant. Using another metaphorical example, we all subject ourselves to rules and laws in our society to be personally less free in some ways in order to have more peace, prosperity and freedom in a greater, longer term sense. Each individual and department within a company has to sub-optimize their personal, short-term agenda so that the total system and its members can have the best long-term results.

What is the preventative or remedial educational solution for these types of lose-lose business case studies? For starters, there is nothing more educational for the hourly employee then to visit with customers who personify the heart of the customer niche that a company is pursuing and hear from the customers’ mouths:

  • why they do buy
  • why they don’t buy
  • what else the company and the employees could do to win and keep their business.

Perhaps a story will help to explain the power of these types of visits. Back in the early ‘90s, I read about an exasperated, desperate US Steel manager who took a hostile group of union leaders to visit a key customer’s buying team in the customer’s receiving warehouse for steel. This customer was threatening to cancel a big, long-term contract that would shut down the US Steel mill which would liquidate a lot of union jobs. The buying team showed the union reps why the US steel was inferior to a number of other competitors’, less expensive, better quality products. The union leaders were shocked, humbled and motivated to go back and tell their fellow union members that big changes in work rules and in attitudes were immediately necessary. Before the trip, they had been convinced that "customer complaints" were only lies made up by management as a negotiating ploy.

Big picture education on why distributors exist, what is customer value, where do premium wages for each job niche come from, etc. isn’t normally easy to implement. As a result, do you have some front-line employees who might be disgruntled because they think that:

  • The company makes much greater profits than it does, because of closed book management.
  • They are being economically exploited, nickeled and dimed to some degree, to make management rich. (Unspoken assumptions: business economics is a static zero-sum pie to fight over; why not get an agent, a union, to better represent you.)
  • They are doing a really good service performance job, because without service metrics everywhere why wouldn’t everyone assume that they are doing a great job.
  • Etc.

Could a little grumbling start downward spirals harmful to the company’s longer term potential for all stakeholders? If so, maybe its time for top management to skim through our "High Performance.." video on a risk-free, return basis to see if it isn’t the tool for sparking virtuous upward cycles instead of risking downward vicious cycles that can lead to problems like US Steel, Whole Foods/Madison or US Airways.

  1. OUR ECONOMIC DOLLAR MATRIX IS RE-LOADED; NOW WHAT?

If you are trying to stay relevant to a teenage son like I am, you may have already seen the latest hot movie entitled "The Matrix: Re-Loaded". This is the second in a trilogy. The original "Matrix" came out a few years ago, the wind-up, "Revolution" comes out in November. The general story line is that we are really living, unknowingly, in an artificial intelligence, software-produced world controlled by machines. But, some of us have bugs that allow us to see that it isn’t real and sense that we aren’t in control. Some of these dis-believers band together to try to overthrow the machines that control us.

The trilogy is using an old plot recycled with state of the art, retina roasting, sonic butt kicking special effects. The first movie’s script borrowed heavily from the beliefs of the Gnostics 2000 years ago. For a fascinating analysis of this parallel which may help your son get turned on to "language arts" concepts like: plots, symbolism, structural balance between characters, leitmotifs, etc. you might skim this URL entitled, "The New Gnostic Gospel." http://www.envoymagazine.com/backissues/4.5/coverstory.html

Another artificial world that most of us unknowingly live in is an economic one of fiat, digital currencies that flow around the globe at light speed 24 hours a day. Most people don’t understand:

  • How the digital jet stream of currency trading works or the $175 trillion dollar derivatives market comprised of illiquid set your own value instruments that Warren Buffet calls "sewage" and "financial weapons of mass destruction".
  • How the US doesn’t save, but instead uses up 80% of the net savings of the world by running big, chronic trade and government deficits.
  • Why the rest of the world is geared to export to us in exchange for more dollars that they recycle back to us by buying government and every kind of asset backed bond (especially mortgages) that we offer them.
  • How we are taking advantage of the rest of the world by currently debasing our currency, because the dollar is the "reserve currency" off of which all of the other fiat currencies are pegged.
  • How the global economy got into a post-bubble situation where it is saddled with too much mis-spent debt and global productive capacity financed by both more debt and expanding money supply that continues to grow faster than now, anemic global demand.
  • The different types of "deflation" and what it means to their net worth on a currency-adjusted, effective buying power basis.

In summary, our global economy is a dollar centric matrix that is seriously out of balance. The rest of the world is hoping that somehow US citizens will continue to take on more personal and government debt to consume beyond their means and buy non-productive assets (big cars and houses), so that exports can continue to pour into our country. Then, no entrenched special interest groups around the globe will have to change.

In the last few weeks, our domestic economy has just been "re-loaded" with lower, longer-term interest rates, 20% annualized expansion of the money supply (a lot of new money out of thin air in the past 4 weeks!); and government tax cuts. Because the dollar is being unilaterally debased, it is now selling off big time in the global currency markets. This sell off is being sold by the agents in charge as a benefit for US manufacturers that will be able to export goods to a world that isn’t and can’t buy. Spin wins with uninformed voters.

Another way to look at what our government and Federal Reserve are currently doing is to see if this opportunistic reflation will be the first step towards forcing the rest of the world to rebalance their own economies to generate more internal demand and reduce their dependence upon exporting to the US. But, history and democratic politics suggest that entrenched forces will line up against a global rebalancing. The next step will probably be competitive devaluations of the currencies of other exporting countries. Japan is probably already monetizing the bad debt write-offs of their big banks to keep the yen from going higher against the dollar. The Chinese and the rest of the Asian tigers will just keep their currencies pegged to the plunging dollar. Euroland is now going into a recession risking big defaults in Germany, so the European Central Bank will probably start lowering interest rates with faster money supply creation very soon.

Then what? If you want a road map for what has been happening and what is most likely to continue to happen in slow motion over the next few years, check out this short commentary and their "cycle of deflation" diagram: Article: "The Cycle of deflation": The URL is: http://www.comstockfunds.com/index.cfm?act=Newsletter.cfm&CFID=1301714&CFTOKEN=55456787&category=Market%20Commentary&newsletterid=989&menugroup=Home&aol=1 (you may have to breakdown this address in order to open it)

A graph of the cycle (we are currently at step 5 and 6): http://www.comstockfunds.com/files/NLPP00000/132.gif

What does this all mean to us? If we have all of our net worth in dollars, then we have already lost a lot of purchasing power wealth. If we had shifted, for example, some money market funds into Euros a year ago, we would have 26% more spending power today. 30% more if we had shifted in Argentine pesos a few months ago (all resource rich exporting countries have had big currency increases in the past few months). Is it wise to have 100% dollar exposure, when our government is making huge unprecedented moves to deal with huge unprecedented economic imbalance problems?

If we own a commercial building or house, it might still be rising in a property bubble blow-off stage, because the massive amounts of new money supply liquidity have to go somewhere. Should we sell our warehouse by the first quarter of next year and buy it back for a lot less in 5 to 10 years?

If we have a lot of money tied up in inventory for which new, excess production is being created in China, when and how should we take advantage of equally excellent goods made for 5 to 20% of the landed cost of US goods to avoid some big write downs?

Will the re-loading of the dollar matrix help the economic recovery that has been promised every quarter for the last 12 to finally happen later this year? Or, will we have a bit of an Indian Summer before consumers finally stop buying out of debt exhaustion and shrinking job prospects?

One thing is for sure: anytime is a good time to replace unspoken, flawed assumptions for how to run a business successfully with ones that work dramatically better, because 90%+ of all of the competitors won’t change. If and when you and your management team want to systematically surface and discuss your success assumptions and test them against the assumptions and how to’s for high performance service/distribution management, our: web site materials, our video and these commentaries can all help.

That’s all for this week! Hope you will please pass excerpts of this commentary on to friends and colleagues or tell others about our services.

 

 

Bruce Merrifield

Bruce@merrifield.com

919-933-7474