September 24, 2003 - Distribution Channel Commentary (DCC) # 40

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THIS WEEK’S TOPICS:

  1. Case Study on Channel Change Management: Why did Wal-Mart change and the rest knowledgeably watch two times around?
  2. Follow up on last week’s raising prices on losing contracts case study.
  3. Survey finds 50%+ of employees in the US are unhappy with their jobs – some thoughts.
  4. Quotes from a reference on why: Few companies truly want to improve their profitability.
  1. Case Study on Channel Change Management: Why did Wal-Mart change and the rest knowledgeably watch two times around?

When distributors within a channel try to significantly change things for the better, they will not just run into internal resistance and political pushback. They will also run into resistance from some more vocal customers and/or suppliers that don’t want to go along with the change.

There are unspoken, somewhat hidden channel culture rules or habits, which, if broken, will spark allied resistance to change from channel "partners". Then, competitors will exploit this dis-satisfaction by trumpeting that they would never think of doing something so disagreeable, although in the long-term perhaps most sensible. Just like US politics, a politician can’t tell the voters that we need to raise taxes and cut spending to balance the budget. The voters don’t want to hear it, and the competitors will simply ridicule the idea without offering a solution to the real problem other than to keep borrowing to fund the gap and let the future elected leaders deal with an even bigger problem.

The biggest, most instructive channel change case study that is still happening stars Wal-Mart. They did not come up with the idea of "quick response" replenishment; it wasn’t their initiative. The Textile Manufacturers invited them, along with the much bigger-at-the-time firms named K-Mart and JC Penney, to do some experimental tests in 1983. Why did Wal-Mart forge ahead and the others dither? Why was Wal-Mart then able to apply their QR capability to the grocery industry starting in 1990 to become the biggest and most profitable grocer in the US within 10 years, while again, the grocery industry knowledgeably watched? Read about this and the conclusions that can be drawn and applied to any channel re-engineering initiatives at www.merrifield.com.

The case study is the introductory part of Chapter 3 from our forthcoming book, Reinventing Distributor Profitability. It is posted on our home page under the red star along with the first 2 chapters of the book. Hope you enjoy and benefit from it!

   2.    Follow-up on last week’s raising prices on losing contracts case study

In last week’s "Distribution Channel Commentary" (DCC #39 dated 9/17/03), topic #3 was a case study on a client who had successfully increased their margin percent on a $2 MM+ integrated supply contract by 10%! They went from losing 5% at the profit before interest and tax line (PBIT) to making 5% which was a big swing in profit improvement for the next three years on the renewed contract.

We inferred that both distributors and their customers might be wising up about what is "fair" pricing and profitability for the "integrated sole supply contracts" that have become popular for the purchasing of indirect or MRO (maintenance, repair and operating) items within large industrial firms starting around 1996. Well here is more evidence that "win-win" re-negotiations are happening.

First, an article posted at progressivedistributor.com back in the fall of 2000 speculated on whether the day would come when distributors and customers would get to "win-win". It is an instructive read with some good guidelines from a panel of three experts (Dick Decker of IDG, Prof. Jim Narus and consultant Scott Benfield). Here is the link: http://www.progressivedistributor.com/progressive/archives/Distribution%20mgmt/Managed%20inventory.htm

Then, fast-forward to the present for another article in the current (9-1) issue of Industrial Distribution magazine. The article entitled "More Moving and Shaking, Less Wandering" is an interview of the consultant Frank Lynn and one of his associates by the magazine. Key points are that: "in some cases, it took 10 years to figure the formula". Both suppliers and end-users are much more (pre) educated about why and how to do integrated deals. Suppliers are much more picky about whether their capabilities will fit a prospective end-users RFP. The better, smarter integrators that are pulling away from the pack have achieved 4 to 6% PBIT on contracts (occasionally higher) versus the 1 to 2% average PBIT being achieved by all distributors to industry. If you don’t want to take 10 years of losses to figure out some new way of selling to your customers, regardless of your channel, you might want to skim through this article at the following link: http://www.manufacturing.net/ind/index.asp?layout=article&stt=000&articleid=CA319045&pubdate=9%2F1%2F2003

The themes that are in the ID article above have been reflected in the latest reported numbers from publicly traded distributors that are heavy into integrated sole supply contracts. A most dramatic example is Strategic Distribution Inc (symbol STRD) reported the following for the first half of 2003: "First half revenues for 2003 were $78.1 million, compared to $165.0 million for the same period in the prior year. The $86.9 million decrease in revenues from the first half of 2002 to the same period in 2003 was primarily attributable to the termination of the Kraft integrated supply agreement, the termination of unprofitable In-Plant Store(R) contracts, and to weakness within our manufacturing and energy customer base…The Company reported net income of $0.4 million or 14 cents per share for the first half of 2003 compared to a net loss of $3.9 million or $1.27 per share for the same period of the prior year." Reading between the lines, sounds like SDI is either shaping up or walking away from losing customer propositions. Their sales are dramatically down, but their profitability and cash flow is up. Similar patterns can be seem if you read between the lines for the flat to declining sales, but improving profits on integrated supplies for both Industrial Distribution Group (symbol IDG) and WW Grainger (symbol GWW). Grainger, in addition, has stopped pursuing sole supply deals in which the overwhelming percent of the MRO spend is not compromised of their normal stocking capability (e.g., automation support, pipe-valve-fitting, etc.). They instead are going after national accounts that have light commercial needs like the US Post Office facilities.

Here are some bottom line guidelines to improve your bottom line for new-to-you, selling efforts to big potential customers that involve inter-company, business process re-engineering for win-win benefits.

Pick your partners carefully. Although every customer will pay lip service to "win-win", most will expect the supplier to pay for all of the up-front development, change and risk costs while they receive immediate, measurable reductions on total procurement costs. Ask the prospect if they have any other "win-win" supplier deals that involved some degree of outsourcing of internal activities and inter-company process re-engineering. If so, what did the customer learn and what advice do they have? Ask to speak to the other supplier(s) to ostensibly get coaching tips on how to work with the customer. But, the bigger reason is to find out if the customer can truly be a win-win partner that will share both the development cost and risks as well as the eventual total benefit gains.

Develop together:

  • An analysis of what the current replenishment process looks like versus the eventual one.
  • A list of all of the development costs and how they will be done together and shared.
  • A list of all of the total procurement cost benefits and how those will be shared for a true, long-term, sustainable win-win deal.
  • The selection of project co-champions, one from each company, who will be joined at the hip.
  • The selection of what key metrics will be tracked to insure that the final intended results for both sides due in fact happen.

For a nine step process on how to – identify, pitch, up-front contract, install, measure, improve and perpetuate on a profitable basis – routinized, win-win relationships with key accounts, see video module # 4.13 in our "High Performance Distribution Ideas for All" video (for more info see the video links in the center of our home page)

   3.    Survey finds 50%+ of employees in the US are unhappy with their jobs – some thoughts.

On September 18th, the Conference Board reported that a survey of theirs had determined that 48.9% (less than half) of US workers were satisfied with their jobs, the lowest since the survey started in 1995. For a report on the survey, check out this link to a short article: http://www.msnbc.com/news/968869.asp

This was actually the second survey that I had read about in the past month on growing job dis-satisfaction. The first one, which I can’t put my hands on, had determined that the best workers were, as a subgroup, the most dissatisfied with the biggest percent planning to find new employment as soon as the job market recovered.

What do you read into these results? For those of you who know me, you may not be surprised that I have few theories and opinions about these survey results. First, I infer a sense of entitlement. We all got used to total compensation and work place privileges rising during the ’96 to ’00 boom years as unemployment trended down to 3%+. Now that we are in the downside of the post-bubble economy bust with – unemployment climbing, wages flat or down, healthcare costs contributions rising along with work-harder, employer demands rising – we are bummed. I think more employees should be glad that they have a job considering the giant sucking sound that is taking jobs and compensation to China, India, Russia, etc. These new capitalistic countries are building excessive, redundant capacity to do things for a lot less than we have been doing here. Their citizens just want to eventually average their wages out with ours.

Second, I infer a bit of childish whining: "I want more and Big-Daddy management isn’t giving it to me, they are cutting me back. I’ll show them, as soon as the economy improves I’ll quit and go find a more benevolent (and competent) Daddy who makes material progress happen for me."

But, doesn’t it take two to play this game. Why have company executives felt the need to continue to be the Big Daddy that many of the employees want them to be? Why can’t management say (in a more verbose, gentler, kinder, more diplomatic way): "Times are tough. We have to rethink everything we are doing to maximize value for potentially profitable customers within our #1 niche(s) of customers and shape up or out losing customers in our portfolios, especially the ones for which we don’t have the best, one-stop-shop, lowest total procurement cost for."

"Every employee can be either part of this reinvention solution, or they will be part of the problem.

You can’t be part of the solution unless you are given more numbers to measure how you, your department and your service process teams are all doing. Then, there is a good chance of growing gross margin dollars per employee that will in turn grow your total compensation."

"If you would like to retrieve the privileges of the past and grow them in the future, you will have to be, from now on, more responsible. Privileges and responsibility must now be tightly correlated, because the economic tides in the US are not going to lift everyone’s privileges without responsibility any longer.

Some of you won’t like being measurably exposed for being cross-subsidized by the rest of the employees. Others will have too much internal anxiety to become more responsible. You will probably self-select yourself out of this new high performance environment which is OK, because we will downsize our losing and breakeven activity for which we will need fewer, but on average, better people generating more margin per person and greater operating income."

"Reinventing the company’s profitability will take some reinvention on the part of all of us at the individual level. When we try new things, we don’t do them well at first. We must fail forward towards where we are going, making good mistakes all the way to new competence. It is only fair that I should lead by example in the personal reinvention area. I will start by announcing that we are going to share all of the general numbers with all employees and especially PBIT/customer ranking and detailed analysis reports. We won’t do this perfectly at first, but if we all work together we will learn how to turn this information sharing into much better results for all stakeholders. I will also confess that I have been historically wrong to take on too much patriarchal responsibility for meeting the economic expectations of all employees; the management team can’t make new, improved better strategically guided ideas work without everyone having an adult, partner role in making new, better things happen."

"Tough times require big changes to achieve big turnaround gains. We can’t tinker around the edges of all of our past practices. We have to fundamentally rethink and reweave what we do individually, departmentally and company wide to become truly customer profitability centric."

For more on why and how to go "open-book" see articles at www.merrifield.com #ed: 5.14 and its support notes. For more on being customer profitability centric read Chapter 1 of our forthcoming book that is posted on your home page.

And for more on why companies really don’t want to improve profitability see topic #4.

   4.    Quotes from a reference on why: Few companies truly want to improve their profitability.

Perhaps out of envy, heavy weight business author Adrian Slywotzky has penned a book imitating the style of the Blanchard and Johnson’s "One Minute Manager" and Johnson’s "Who Moved My Cheese?" Check out the reviews at amazon.com.

In the first of 23 short lessons on profitability that a young business consultant is learning from a Zen Profit master. (The reader is instructed to read one per week.) Here are some summary quotes/thoughts on why companies really don’t want to improve their profits:

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"Today’s Profit model was a simple one…Invest time and energy in learning all there is to know about your customers. Then use that knowledge to create specific solutions for them. Lose money for a short time. Make money for a long time.

I don’t get it. You laid out the whole plan for them….they didn’t choose to follow the winning strategy, even after they knew it would work? …Did you ever work with any other company that simply refused to be successful?

Actually, it happens all the time. I can give you the complete recipe for the secret sauce, and the chances are good that you still won’t use it…It’s a bit of a mystery. There’s probably no one reason why people seem to prefer failure to success. We know that change can be psychologically threatening – that’s part of the answer…(change) takes a lot of hard work – much more than most are accustomed to. That’s part of the answer, too. To succeed in business, you have to have a genuine, honest-to-goodness interest in profitability. And most people don’t."

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What do most people, managers and all other employees really like doing more than reinventing profit power? Doing what they know best, fine-tuning the past, even when they know the trends are negative. Perhaps as much as learning the secret sauce recipes for improved profit power, we have to get in touch with our underlying psychological needs for fine-tuning the past and defuse those.

 

That’s all for this week! Happy (profit-power) trails to you until we meet again!

Bruce Merrifield

Bruce@merrifield.com

919-933-7474