June 25, 2003 - Distribution Channel Commentary (DCC) # 30


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  2. Regular readers know that last week I begged off my weekly blogging duty for an 11-week summer stretch while I worked on writing the mother of all how-to distribution management books (stay tuned to our web site for excerpts and progress reports). But, I couldn’t help myself from doing this one last abbreviated commentary before going to more sporadic, summer postings.

  4. Here’s a URL for a short USA Today business section article that (6-24-03) that you should quickly read:http://www.usatoday.com/money/world/2003-06-23-china_x.htm.

    Even if you don’t, it just says that SARS was a bump in the road for China’s accelerating rate of manufactured goods being exported to the US. I know from anecdotal feedback that there are at least two camps of thought in the world of domestic manufacturers and their distributors. One group thinks this China trend is about over and that we will survive it just like we did when manufacturing started leaving for Taiwan and Mexico starting in the early ‘80’s. A few in this group speculated that SARS and yet other domestic problems will actually derail the China train leaving a lot of domestic buyers without supply.

    (Another big problem I’m watching is China’s 4 state owned banks. They have non-performing loans to state owned companies that are officially reported at 40% of China’s GDP, but un-officially it is about 100%. What’s the solution to creating a viable banking industry? Perhaps one day soon, the government will tell all of their super-saving citizens that their balances have been zeroed out to pay off the bad loans. With a gun to their head and no other alternative, the savers will take a bit of token equity in the newly constituted, private banks and start over. Absolute dictatorships that are committed to being world class, hardball capitalists are hard to beat, especially with the work, education and thrift ethic of the Chinese.)

    There is another, smaller group of executives that are at the optimistic end of the spectrum. They have been to China on sourcing, shopping trips and sound like modern day Marco Polo’s. They feel that China will do anything to make sure that direct investment capital feels confident about continuing to pour into the Chinese free trade zones (like quarantine entire villages of people if a few have SARS). They point out that there is no end in sight of the supply of educated, English-speaking engineers who are willing to work non-stop to do whatever you want. The infrastructure and the scale and scope for doing business is better than any other third world country and improving while you watch. And, they are bringing in containers of cloned goods with landed costs of 5 to 10% of their domestic sources. Who are these new sourcers (no Harry Potter economy pun intended)? Manufacturers tend to be the most discrete about what they are doing. Large distributors and some buying groups are sourcing the same goods from the same factories as their suppliers (or before some of their traditional suppliers) in order to not only cut their suppliers out, but to compete with their suppliers as a first-here, lower-price importer to other types of distributors. And, of course, the big box stores are sourcing not only the same items from the same factories, but also new, super-low priced, sufficiently good knock-off lines often with new, Chinese brand names on them instead of store brand names. Maybe hard-pressed, consumers will start to buy more of these trade-down, super value-priced goods.

    We have all witnessed the wave of consumer products that have come from China in the past 5 years, will a wave of niche, industrial and commercial products now come from China? I think so. I also think competitive quality and super-competitively priced cars will be coming from China to the US within 3 to 5 years. This next wave of products will be a huge, one-time, opportunity for the quick and strategic manufacturers and distributors and a big problem for the slow and hopeful.

  6. Because we all have to continue to re-visit and re-think our strategic assumptions and plans in these discontinuous and economically challenging times, I have put together 15 graphically rich slides on the with a lot of commentary and additional references to consume as you wish. It should already be posted under our "slide show" button at www.merrifield.com.

    The slides that will challenge your unspoken, perhaps "old-way" thinking the most are numbered 10 – 13. One of the key themes in these slides is that both manufacturers that sell through distributors and distributors need to fundamentally re-think their businesses and how they run their businesses around continual analysis and re-serving of their most profitable customers. The pre-occupation with products, geographies and territory management must become subservient to customer segment profitability managers.

    For those of you who are having a strong negative reaction to this last point. Please read the following book review on what I think is a very important, new book. 


Key facts: The book is authored by Larry Selden and Geoffrey Colvin. It was released by its publisher, Portfolio, on May 23, 2003. It is in hardcover with 243 pages priced at $19.57 at Amazon.

What’s it about?

You can read the initial editorial reviews at Amazon, but so far the book is so new that there are yet to be any customer reviews. One of the authors, Colvin, is a senior editor with Fortune, so key excerpts of the book have been published in the magazine starting last September. I’ve listed three Fortune published excerpts in a reasonable order with links below. You might print them out, read through them and then decide if you want to buy the book too.

a. "Will this customer sink your stock?" (9-15-03) http://www.fortune.com/fortune/articles/0,15114,368649,00.html

This article puts forth the key thesis of re-thinking our businesses around our historically most profitable customers; the 20% that generate 150% of our profits to offset the 50% losses that come from our bottom 20%. It gives some compelling case examples and general guidelines for how to re-organize. It concludes that we need customer segment managers with P and L responsibility for different customer segments.

b) "What Customers Want" http://www.fortune.com/fortune/ideas/articles/0,15114,460291,00.html

This article gets into the six step iterative process that customer segment managers need to do for the segments they serve. The authors call this process "value proposition management" (VPM). This article, incidentally, is in the latest issue of Fortune (dated 7-7) although it was posted on their web site on 6-23. (How this for timely blogging on my part? And, isn’t it handy to have a senior Fortune editor as a co-author in order to get some fast, good publicity!)

c) "Five Ways to Fail" (9-15-03) http://www.fortune.com/fortune/articles/0,15114,367640,00.html

This article was a side bar to the first one listed above. It points out 5 different reasons for why companies agree that they need customer profitability management, but then the old ways continue to prevail and the VPM that is detailed in the second article above either never happens at all or doesn’t last on a successful basis.

What’s my honest opinion?

I think the book is an important one because it is the first dedicated to the concept of re-thinking your business around customer profitability rankings. The authors claim that most companies should re-organize their thinking and their businesses organizational structures from being managed by products, geographies and territories to being driven by customer profitability segmentation and value creation. I would concur, but modify the "most" to all companies that are in mature industries with mature products and services being sold to mature customer segments.

Before I ramble further, I must reveal a bias. I have been preaching and teaching the ideas of re-thinking distribution businesses around customer profitability since 1976 when I was turning around distribution firms for a regional consolidator in the paper channel in the mid-west. As an industry volunteer, I taught a convention workshop for the National Paper Trade Association in NYC in 1979 on "solving the small order problem"; the audience was stunned by the opportunity, but not inclined to do anything because "my sales force wouldn’t stand for it". As a consultant since 1980, my thinking and practice of these ideas has continued to evolve, so I certainly appreciate the credibility that this book might give my customer profitability cause.

Now for a few more specifics:

  1. The book does build nicely, although more generally, on my distribution specific ideas and plays that are centered on customer profitability ranking reports. (For new readers, here is an ad. See articles on our web site in this order: 2.15, 2.3 (written in ’89!), 2.19 (+ a very detailed case study from 5/02). All of this thinking is repackaged into bite-sized, video training modules for all employees in our "high performance" video that is promoted on our home page.)
  2. Important additions to my thinking are the matrix management structure(s) that the authors recommend for making their new thinking really work. Their six-step VPM process (detailed in the second of the three Fortune articles above) is a refined, crystallized process for what I have advocated.
  3. "Chapter 10: A Better Way to Do M and A" nails why 19 out of 20 roll-up consolidators within distribution channels paid too much with too much debt for now fading profit power thinking there were economies of scale in product volume. This chapter alone is a must read for the following types of people: would be acquirers of distribution companies; potential sellers of distribution companies that want to crank the value of their firm as fast and high as possible; merchant bank equity investors and bank loan officers trapped in poor performing private roll-ups; stock analysts that follow the consolidators that were able to go public; etc.
  4. The style of the book is a bit breezy, redundant and fluffed up to make a book out of a shorter story. If you find yourself wandering while reading, just pick up your tempo and topic sentence read for awhile. Serious students of business might slight the lightness of the research and the weak set of case studies that are few and mostly consumer, financial service companies. But, there can’t be detailed, prescriptive solutions in a book with this general theme, because every company’s historic, best niches of customers will be unique and require some art to understand exactly why they are so profitable. I think that the authors’ guidelines are sufficient to get any type of mature company going down a new, highly fruitful path.

Final thought:

If you are a distribution executive, how will you answer the following questions that might be posed by – your banker, your private equity investor, a key supplier, a potential acquirer, an important new management prospect, an independent board member – who might have just read this book?

  1. What is your #1 niche of customers that your company pursues?
  2. Who are the five most profitable customers in that niche by name and rank?
  3. What is your unique, tuned, best-total-economic value proposition that you offer them?
  4. Who are five most important other target accounts within this niche to whom you are pursuing with this best value proposition?
  5. Who are the five biggest losing accounts that you have at each location and what are you doing to either make them profitable or price them away to free up resources that they take to re-apply to more profitable customer opportunities?
  6. How do you avoid pursuing more losing accounts in order to spend all of your marketing efforts on pursuing potentially more profitable accounts?
  7. Who has P and L responsibility for improving the total profits from the three types of key accounts? How do you track how they are doing and pay them on their improvement results?
  8. How are these customer profitability activities included in your strategic plan and re-woven into your organizational structure?

If you don’t have good answers to these questions, but would like to, I hope the references in this commentary will help.

If you have questions or any kind of reactions to these or other commentaries, please don’t hesitate to contact me at bruce@merrifield.com or 919-933-7474. That’s all for this week!


Bruce Merrifield