September 10, 2003 - Distribution Channel Commentary (DCC) # 38

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THIS WEEK’S TOPICS:

  1. TIME FOR "EFFECTIVENESS" MOVES?
  2. ESCAPING THE RULES AND INFOTECH INFRASTRUCTURE THAT BINDS US
  3. CAN YELLOW CORPORATION BE A VALUE-ADDED CONSOLIDATOR?
  4. EXECUTIVE INFORMATION SYSTEMS BECOME DASHBOARDS IN CUBICLES
  1. TIME FOR "EFFECTIVENESS" MOVES?

After 2 to 3 years of hard times in many distribution channels, isn’t hunkering down and retrenchment through cost cutting and working harder with fewer people getting a bit stale? Are some of you starting to think about trying new ways to grow profit power by being more innovative and effective?

By the way, what does "being more effective" really mean? How should we measure "effectiveness"? What does "innovate" mean? And at what level should we innovate: corporate business strategy; re-engineering systems; and/or trying to improve the skills of a department or individuals?

Being more effective does not mean doing what everyone else in the industry is doing or more specifically trying to imitate what one, head-to-head competitor is doing in a dominant, excellent way. Shouldn’t we seek to have a unique value proposition for some niche of customers? If we offer, alternatively, one general, "good service" value package to too many different sizes and kinds of customers, they probably won’t all value it the same or be equally profitable accounts.

As a starting point for innovative effectiveness, we should look at what we absolutely do best of all and worst of all, then do more of the first and less of the latter. The best measure of "best" is were we make the most money and "worst" is where we lose the most money. If a big share of our product sales (80%+) are on non-exclusive, commodity type goods, then the profit power (and losses) must come from the customers who buy our high turn-earn products and not from the products themselves. However, we do lose money on the bottom 50% of our stocked items that are about 1% of our sales. Those products are losers all by themselves. Learning lessons from yesterday’s losers is for another commentary.

If you are looking for answers on how to:

  • Measure and rank customer profitability quickly and sufficiently well to….
  • Then identify niches of customers that buy the same common basket of items…
  • To then sell lots more common, best items to best customers on a systematic basis….
  • To generate high, flow-through to the profit line gross margin dollars…
  • To sell "a lot more to our core by ‘04"…
  • By co-learning with best, most progressive customers.. .

Then, you need to read both Chapters 1 and 2 of our forthcoming book, "Reinventing Distributor Profitability." Both chapters are posted on the homepage of our web site at www.merrifield.com. Although the work is copyrighted, we grant any and all permission to download, print, copy and redistribute the information as needed to get everyone in your company thinking about how they can be part of the get more effective solution and not part of the problem.

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    2.   ESCAPING THE RULES AND INFOTECH INFRASTRUCTURE THAT BINDS US

Do you think that fish know they are in water? The flat earth society had their long-time limitations too. Although the ancient Greeks proved that the world was round and calculated the circumference to within 200 miles of today’s figures, it took awhile before the majority of expansionary European Kings decided that the Earth wasn’t flat and that sailing west to get rich was better than going east. What unspoken, and to some degree flawed assumptions and management rules currently cause us, and the majority of our competitors, to do the same self-limiting things? Maybe if we tried some simple, new, right measures that our competitors can’t yet believe in or pursue, we could do a lot better!

Here’s an example of infotech infrastructure limitations. Are all of your inventory purchasing, measuring and managing assumptions based on Gordan Graham's thinking that was built into the distribution software package that you and countless other competitors have all bought from one of 20 different leading distribution ERP software vendors? If so, maybe we then assume that:

  • A target of X% fill-rates for all of our inventory items is a good economic trade-off point.
  • High turn-earn products are the source of our profits and we should design more product promotions to sell then to more customers.

If so, then aren’t we doing what everyone else who owns the same type of software is doing? Where is our competitive, total-service value edge? If you want to get outside of these types of unspoken rules that are reinforced by current infotech infrastructure reporting and use different metrics for competitive advantage, then read Chapters 1 and 2 of our new book.

More specifically, read the case of ABC Distribution Company towards the end of Chapter 1. They discovered how to zero in on the most profitable customers within one specific niche of customers. Then ABC determined what the customers common basket of items was (500 items out of 10,000 SKUs). They then significantly beefed-up the fill-rates of those 500 items as a first step down a new value creation and productivity improvement path.

Also check out the last third of Chapter 2 to find out why there is no correlation between how much companies spend on infotech solutions and their ROI. Learn how to use the "kinetic chain of profit power" to rethink how to use your current infotech solutions far more effectively.

    3.   CAN YELLOW CORPORATION BE A VALUE-ADDED CONSOLIDATOR?

Go to our web site home page and click on past commentaries in the upper right hand corner, then check out #18, topic 4 entitled: "Lessons From Yellow Transportation" (the national LTL trucking company).

(Here’s the direct link: 18commentary.asp)

This commentary summarized some service turnaround tactics that a new CEO, Bill Zollars, had used to take a profitless company to faster growth and a 7% operating profit rate. Some of the key techniques were to rank customers by estimated profitability contribution and shape up or out the losers while retaining and selling more special/extra services to the best. And, by getting all of the union(!) employees to buy into being part of a better service level solution.

Now Yellow is planning to acquire its slightly bigger, head-to-head rival, Roadway Corporation. Yellow will run them as two competing brands with a bit of back-office consolidation expense savings. The gamble is that the same turnaround strategies and tactics will transform Roadway. (For more see Business Week’s Sept. 8, 2003 issue article entitled "Yellow: Burning up the Roadway?")

When an entire industry is competing on the same old, semi-flawed assumptions that:

  • Any customer is a good customer (instead of 20% generate 150% of the profits)
  • All customers are treated pretty much the same with bigger price cut contracts for the bigger volume customers (instead of segmenting them into niches and servicing, pricing and terming them differently)
  • More volume means more economies of scale and more profitability (in service businesses most of the costs are not only variable, but the bigger companies make less money as a percent of sales and have lousier service levels than family run regionals.)

Then, competitors like Yellow can be different ("innovative and effective") by targeting, retaining and growing with the best 5% of the customers in the most profitable niches.

It will be interesting to see if Yellow can succeed with two competing union cultures, and if any distribution companies are inspired to apply Yellow’s turnaround strategies and tactics to grow faster and far more profitably. There is certainly no shortage of consolidators in distribution channels who have used financial management "rules" to try and create more profit power totally unsuccessfully. Maybe some of them can achieve an economy of scale for strategic reinvention of profit power for their acquisitions. As long as locations are of a certain (profitless) size, it is never to late to practice what Zollars has been doing at Yellow.

    4.   EXECUTIVE INFORMATION SYSTEMS BECOME DASHBOARDS IN CUBICLES

The Executive Information Systems (EIS) of the past stayed in the big honcho’s office for looking at financial data anyway you wanted. The problem is that financial management output data has nothing to do with measuring the inputs for strategic value creation or profit power. Now some companies are learning to capture new inputs into the database and sharing the tracking data with the process and operational managers who can make those inputs better. Moreover, everyone can track different metrics that are important to their area and they are called "dashboards".

If you want to know more about this trend, here are two links to two short, related articles that are excellent reads from Computerworld.

"Dashboard Democracy" http://www.computerworld.com/databasetopics/data/story/0,10801,82064,00.html

"Not Good for Control Freaks" (sidebar to article above) http://www.computerworld.com/databasetopics/data/story/0,10801,82065,00.html

For those distributors who sell "indirect" or "MRO" items to bigger industrial companies, make sure you pay extra attention to the case study on Motorola’s use of dashboards with their indirect purchasing people in the first article above. In a minute, any PA can see what Motorola's "global spend" is with one supplier; for a particular item or category of item. These tools will give new power to centralized purchasing czars who want to negotiate ever better, ever tougher, regional to global integrated, sole supply deals. This trend is getting new firepower from SAP and other big ERP vendors.

The general question I have for all distributors is: when will you decide to track the numbers that really matter and share them with the people who can really make them improve? For more on this topic read:

Chapters 1 and 2 of our forthcoming book; and our article entitled "Data into Dollars? Not Yet!" at this link: 2_18.asp

 

That’s all for this week!

Bruce Merrifield

Bruce@merrifield.com

919-933-7474