August 27, 2003 - Distribution Channel Commentary (DCC) # 36


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  1. An Excerpt from "Chapter Two" of Our Forthcoming Book, "Reinventing Distributor Profitability"
  2. Wal-Martís Virtuous "Total Procurement Cost" Cycle Keeps Sapping the Rest.
  1. First of Three Excerpts from "Chapter Two" of "The Book"
  2. Iím continuing to grind away on the book for which I still hope to have a finished draft by mid-September. Our plan is to post and give away the first two, perhaps three chapters of the book in the hopes that you will get on the hook and spread the word. We expect the book to be published in soft cover later in the fall.

    In case you missed some recent commentaries, we have already posted Chapter One: Out of Crisis Comes Strategic Clarity (?) It outlines a strategic process that is aimed at helping every distribution location find its unique, elemental value-creation path to pursue in a continuously innovating and differentiating way.

    Although Chapter One is a heavy conceptual read, I can guarantee strategic enlightenment for every distribution executive. It will definitely add to your knowing-doing gap. To then address why 95% + of all mature industry firms canít execute new stuff they way they would like, I have dedicated Chapters Two and Three to helping firms identify and name the un-spoken assumptions and cultural habits that freeze us into a status quo.

    Chapter Two is entitled: "New Maps vs. Financial Management = Blind Spots

    What I have done in this chapter is to take a number of traditional financial management themes or guidelines that we all practice and applied Chapter Oneís strategy map thinking to them to identify possible bad side effects. Anyone who feels that dumb stuff and game playing might be going on in their business in order to meet the numbers will find true enlightenment in this chapter.

    I have split the chapter into three excerpts for the next three commentaries after which we will post all of Chapter Two on our home page.

    This week, the first excerpt will cover: "General Comments on Financial Management for Profit Power"

    Next week, the second excerpt will cover: "Buy low, sell high, collect early/pay late and hire them cheap/work them hard".

    And in week three, we will cover: "sell more volume to share fixed costs; cut costs with infotech; and share numbers on a need-to-know basis."

    The first excerpt is attached to this email in a word document. Please remember that this is a draft, and we really encourage any feedback and editing ideas that you may have. We have continued to receive excellent critiques for Chapter One that will make it a better final product.

  3. Wal-Martís Virtuous "Total Procurement Cost" Cycle Keeps Sapping the Rest

In August I noticed that Wal-Martís numbers are continuing to run on the high side of forecasts, and the rest of the retailers that have significant overlap with them Ė Target, Circuit City, Toys-R-Us, Costco and most of the super-market chains Ė are losing steam. Whatís going on? What lessons are in this for distributors? Here are some thoughts:

First, Wal-Mart has defined and taught consumers to buy the lowest, "total procurement cost". Their proposition includes the following elements:

  • One-stop-shop at their SuperCenters for the 60,000 fastest moving consumables in our life.
  • Fill-rates of 99%+, because their "quick response" coordination and information sharing with suppliers is so good, not to mention their operational execution excellence.
  • Everyday average prices of about 35% of suggested retail list prices because they wonít participate in most channel deal programs which upset both the steady, predictable flow of goods bought by the consumer and the everyday high fill-rates of their system.
  • Donít waste time in clipping and redeeming coupons to go to multiple stores that often are out of whatever is being promoted.

This package has had a virtuously, improving cycle for years for several reasons:

  • The more they sell and run through their automated distribution systems, the more efficient they become sharing the cost savings with all of their stakeholders.
  • With their enormous scale they always are looking for next-level, total supply chain cost reduction opportunities. Their private label goods program has expanded to reach 40% of their current sales. Old Roy, for example, is the worldís #1 selling dog food brand. Samís Cola is Coca Colaís recipe to one billionth of a part for ingredients; it is sold, of course, at a big discount to the "real thing". This knock-off, price comparison for #1 items in a manufacturerís line forces them to eliminate the cross-subsidized pricing between the super movers in a line and the slow items that need to be dropped.
  • Their continuing evolving supply chains and sources now go to China bigger and better than anyone. Last year they imported $12 billion of manufactured goods, about 10% of the US total.
  • The items under one roof continue to expand. From 5000 in their original small, southern stores to over 60,000 in their SuperCenters around which they are adding a mall of special services Ė auto servicing, gas her up, etc. The one-stop-shop value proposition continues to grow for time pressed and now economy pressed consumers.

It is easy to understand, how the other retailers who were all much slower, if not oblivious, to the quick response, re-engineering opportunity that started back in 1983 are now starting to suck wind. Target reported disappointing earnings the week of August 11th with weak sales in clothing. Wal-Mart has boosted clothing offerings this year with a big addition/push of Leviís jeans. On August 5th Costco reported an increase in sales of 12% with flat earnings due to no pricing power vs. Samís Wholesale and no way to add more service or items to their format without bumping into Wal-Martís superior SuperCenter format. Costcoís stock dropped 18% in one day, and they have a reputation of being well managed. I could go on.

The big question for distributors is: "How can you be the number one, lowest total procurement cost supplier to one customer niche at a time and achieve a dominating barrier to entry in that customer niche?" The answers are in Chapter One and Two of my book. Howís that for a big tease!

Thatís all for this week!