October 1, 2003 - Distribution Channel Commentary (DCC) # 41

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THIS WEEK’S TOPICS

  1. HOW MANY CONSULTANTS…..TO SCREW IN A LIGHTBULB
  2. HOW TO PREVENT HIGH PERFORMANCE BACKSLIDING
  3. PROFIT-GUIDED CEO AS CHIEF (LEAD-BY-EXAMPLE) INTRAPRENEUR
  4. GRAINGER SLIDE SHOWS PROVIDE CASE STUDY LESSONS
  5. FINE TUNING THE SERVICE (AND PROFITS) FOR WILL CALL BUSINESS
  1. HOW MANY CONSULTANTS…..TO SCREW IN A LIGHTBULB

Old joke, serious, timely punchline:

"How many leadership gurus, management consultants, and executive coaches does it take to change a light bulb?"

Ans. "Only one, but the light bulb has to want to change!" (From More Balls Than Hands by Michael Gelb, p.xxxi).

In the past couple of weeks our hot sector/cold sector economy has pushed a few, grand old US firms to, and perhaps, beyond the point of necessary re-invention. Kodak, for example, announced that it will cut its dividend for the first time in 100 years by 70% to free up $3B in cash flow over the next few years to reinvent itself by, among other things, jumping into the inkjet printer market. The stock tanked. The dividend crowd left, and the rest of the prospective investor world is having trouble understanding why they should believe that an already stumbling, strategically challenged company can become a profitable player in the already mature, profitless printer industry.

Motorola’s Chris Galvin, the grandson of the founder, resigned from the CEO job at 53 after 6 years at the helm and a lifetime of grooming for the job. The stock first went up on the news, then started to drop a few days later when Motorola announced that a hot new phone wouldn’t be ready for the Christmas selling season. It turns out, Mr. Galvin’s turnaround programs over the past few years were just mirages. The dog parts of the business have not been fixed or sold, and the need to see the mobile phone as a fashion accessory item has not been executed well.

Wal-Mart has continued to be a model buster and business terminator for mass-merchants and now Wal-Mart has taken on the grocery industry that has not been able to reinvent itself on a timely basis. In the recent past, Sears sold another profitable part of its empire, the credit card business, to "better focus" on their retail business, which has been a dog for years and which I don’t think anyone would buy. K-Mart, after several attempted makeovers and a current bankruptcy process, is still trying to find a longer-term model that will work. And, in last week’s Business Week, (10/6 issue; the article link follows - http://www.businessweek.com/magazine/content/03_40/b3852001_mz001.htm) the cover article on Wal-Mart had these interesting factoids:

  • Wal-Mart has gone from 0% share of the national grocery market to 19% share since 1988, and they are on their way to a projected 35% by 2007. They will open another 1000 super-center grocery stores in the ’03 to ’07 period. Since 1990, 13,000 grocery stores have closed, and on average, two grocery stores close for every super-center that is currently being opened.
  • 20% + of Wal-Mart’s sales are now on private label brands. I priced Coke and Listerine versus the store brands at my local Wal-Mart this past week. Two liter coke was selling for $3.28 while Sam’s Cola, which is the Coke formula made by Cott, was selling for 58 cents! 50 ounces of Listerine was selling for $4.88, and the same size "Equate" store brand which was an obvious, identical looking, identical formula knock off right next to the Listerine was selling for $1.78. Wal-Mart will not allow manufacturers to make 200% of their profits on their fastest moving items to cross-subsidized line extension items that are losers. Rubbermaid, in its hay day, "invented" a new product every day, but Wal-Mart would only stock what really moved at everyday lowest total supply chain costs. Rubbermaid lost huge market share on their gravy items to Wal-Mart store brands, imploded and gotten taken over by Newell, a company that has long catered to the Wal-Mart’s total value production, lowest-price reality and done well by it.

And, the UAW recently completed 5 new contracts with the "Big 3’ auto companies and 2 big tier one suppliers that used to be part of the Big 3 in an unprecedented, short, simultaneous, no-strike-threat manner. Was this enlightened labor-management co-operation? Or, did the parasitic UAW finally realize that its too late, they have violated the #1 parasitic rule – don’t suck your host to death? Unless the Big 3 gets more government protection and subsidies that we all indirectly pay for, the end has started. Note also this past week that Toyota announced it will be making their Lexus SUV’s in North Amercia, and Toyota already has surpassed Chrysler as the #3 producer of cars in N. America.

I may come back to visit the auto manufacturing industry slow-motion implosion in a future commentary. For now, though, I would advise anyone who makes stuff for or distributes stuff into the Big 3’s domestic supply chains to at least read the copy at Amazon.com for the new book entitled, The End of Detroit. And, then ponder the domino effects for plant closings that the UAW has agreed to allow in their latest contracts. For every assembly worker laid of at the 10 plants (20 need to be closed ASAP) how many other jobs upstream will go? What is the ripple effect for our economy?

What does all of this sad news about great American iconic companies not reinventing themselves in time mean to distributors? It’s my theory that about 90%+ of distributors in the US are still product, volume, geography and margin percent driven instead of profitable customer niche centric. It’s also my theory that for the foreseeable future most distributors will be caught between a vise of no pricing power, if not product line and inventory deflation, and rising personnel overhead costs - healthcare, unemployment and workers comp insurance - etc. How should distributors go about re-thinking their businesses and giving up their old, unspoken, dysfunctional cultural rules and reflexes? Read Chapters 1 through 3 of my forthcoming book, "Reinventing Distributor Profitability", which are all posted on our website at www.merrifield.com.

    2.    HOW TO PREVENT HIGH-PERFORMANCE BACKSLIDING

Because enough of the "users" of my video, "High Performance Distribution Ideas for All" have now gotten all of their employees through the entire 53 modules, I am starting to get case study feedback on the results and the next level problems. I will start to share these stories in this and future commentaries.

An industrial paper and packaging/jan-san distributor reported that:

  • The companies’ sales and profits have continued to grow strongly even though their city and traditional account base have been shrinking during the past few years.
  • The employee’s morale is high, and the new profit-power metrics, language and methods have all combined to lift employee productivity and service level standards to new, steady highs.
  • The easy, incremental, most profitable business ("more to the core") has been strongly exploited (just as ABC Distribution did in the case study at the end of Chapter 1 in Reinventing Distributor Profitability). This new business has been the primary cause of better economics for the past 12 months.

His concerns going forward were:

  • Where was the next wave of easy growth and profits going to come from? The "total-team-selling, target account increases are slower going. He seems to be getting a big fatigued at having to be the champion for all of the cutting edge activity.
  • How do you deal with complacency? Everyone worked harder to "certify" with the tapes, then improve service levels and focus on best PBIT accounts and potential accounts with good results. Many of the troops have earned some learn-n-earn, cross-training wage increases, and all employees have been pleased to see profits improve and gainsharing bonuses awarded. But, there now seems to be a bit of arrogance and complacency. What to do about this?

My recommendations:

  • Complacency can set in at each plateau that follows a successful effort to take performance to the next level. I encouraged him to go back to review in the video modules 5.3 and 5.4 in which the "real path of Mastery’ (slide 265) has to be taught and enforced with "six boundary systems" (slide 254) so that the "quick riches and relax" pattern (illustrated in slide 261) doesn’t happen. For those of you who don’t have the video yet, you might check out the following articles at www.merrifield.com:

"High Performance Distribution – Six Key Systems" at this link: (5_10.asp)

and, "Kaizen" or Continuous Improvement – But How" at this link 2_7.asp

  • As for his concern about how he has to spearhead all new cutting edge activity, that is quite normal when a company goes from fine-tuning the historic ways to re-inventing its on-going profit power. Most companies have promoted out and/or squeezed out all "intrapreneurial capability". If you promote the people who work the hardest at making the past work, then that is all they know or feel comfortable doing when they get to be managers. If companies are "lean-and-mean with tight budgets and with tailored incentive plans in place for making the numbers on a monthly, quarterly and annual basis, there is no extra time, resources or permission to experiment with new ideas and make good mistakes failing forward. You might get lucky and find a person who does intrapreneurial acts on their own time at their own speculative expense outside of company hours, but if they get hammered for making one incremental cost mistake, they will shut down and/or leave.

So, when a company starts to reinvent, the CEO has to teach the importance of "pushing the wheel of learning", making good mistakes failing forward and lead by example. (Read Chapter 1 of the forthcoming book for more on these concepts). Step Two is to either find and turn on latent intrapreneur talent already on the payroll by giving them some free time to be a champion for some project and then protect them from the hostile guardians of the past who populate most all supervisory and management positions. Or, hire a new management trainee who is really a special project, CEO assistant who will be able to stand up to the guardians of the past. (This was what I essentially did in my first job for a distribution chain at the age of 24 right out of business school with an MBA.) For more ideas on how to increase the intrapreneurial activity at your firm go to www.intrapreneur.com.

    3.    PROFIT-GUIDED CEO AS CHIEF (LEAD-BY-EXAMPLE) INTRAPRENEUR

In the latest issue of Forbes magazine (10-13, pp. 82 to 84), there is a worthwhile article entitled, "Creating a Killer Product". Here’s the link: http://www.forbes.com/forbes/2003/1013/082.html .

The article is an excerpt from a new book that looks quite promising at Amazon.com entitled: The Innovator’s Solution by Christensen and Raynor (I ordered it!).

For now, I will just take a few excerpts from the Forbes article and then tack on some comments.

"Much of the art of marketing focuses on identifying groups or segments of customers that are similar enough that the same product or service will appeal to all of them. Managers need to segment their markets to mirror the way their customers experience life.."

To help distributors execute what this passage advises, read the chapters of our forthcoming book that are posted at www.merrifield.com. They tell how to:

  • Use simple customer profitability ranking reports to identify the historic best customer niche(s) for each distribution location and the most profitable customers within that niche for closer study.
  • Use common-item usage analysis studies to define the most important common items for which to significantly boost inventory, because having the best one-stop-shop, highest fill rate local capability is the keystone to best total service value.
  • Instead of living the customer’s life, distributor intrapreneurs have to follow their (potential sales) products through a customer’s business and identify every direct and indirect total procurement cost (TPC) element that the distributor may be able to reduce with their total item and service offering. Then, distributors and their sales force have to proactively sell why and how their basic service excellence and optional extra services can lower any and every customers’ TPC. The selling theme must be that "we have basic service with tailored replenishment systems, if need be, that will give you (the customer) the lowest total procurement cost (TPC) that will grow your bottom line".

Back to the article: read the case study on "a fast food chain that wanted to improve milk shake sales and profits". First, they did the classic distribution channel product promotion campaign that both manufacturers and distributors push on to the end-user with no real results. Then, the researchers spent an 18 hour day at the restaurant to notice that half of the shakes were bought in the morning on the way to work and asked the commuters why they bought shakes as a breakfast meal to consume while driving to work. Once they understood all of the pros and cons of different consumption to work options they offered more healthful shakes and added a self-serve shake machine that could use a prepaid card. Sales and profits took off.

Distributors have always reacted to whatever big customers wanted them to do to reduce the big customer’s TPC in the way the big customer define it. How many distributors market to all customers the why and how each element of their basic service excellence package lowers some or all elements of the customer’s TPC? How many sales reps could tell you the 11 elements of TPC and the common "price trap" trade-offs amongst the TPC elements? (For more see this article: 4_2.asp) How many sales reps have done simple, process flowcharts for how a customer buys, receives, stores, controls and uses a product to find out what the customer thinks is important in the TPC opportunity area? (For a checklist for how to do this see this link: ./exhibits/processx.asp)

Back to the article: read the last section on how company’s can find new growth within old customers. The case study is again a consumer case starring the founder of Sony, Akio Morita. "Morita was a master at watching what consumers were trying to get done and at marrying those insights with solutions that helped them do it better. Between 1950 and 1982 Sony successfully built 12 different, new-market, disruptive-growth businesses (including the "walkman"). . . In the early ‘80s Morita began to withdraw from active management . . Sony hired marketers with MBAs to help identify new opportunities (but they used) attribute-based techniques . . .which were no match for Morita’s intuition"

When distributors have to do any of the following breakthrough activities:

  • Approach big losing customers and persuade them to change how they buy so that both parties can drastically lower transactional costs, so they both can win (for an example case see commentary #39- topic 3)
  • Visit with top 5 most profitable customers in the firm’s number one niche and identify ways to re-tune the total service offering.
  • Team-sell the few gazelle accounts in a niche that will provide 80% of the future profit growth out of that niche for some distributor supplier(s) at the expense of the bottom 50% of the customers that are the living dead or extinction in motion.
  • Install a learn-n-earn cross training certification program so that perfect service and 100% on time shipping/delivery/pick-up can happen regardless of the fluctuations in incoming order rates.

Who will be the champion, the intrapreneur, the person who will make these things happen over all of the passive aggressive resistance that guardians of the past will put up? With the Sony case study and the CEO with backsliding problems in topic 2 above, we see that it must be the CEO who leads by example. Then, the CEO has to rethink the culture and perhaps hire some intrapreneurial talent to get some help in the cutting edge, new growth challenge area.

    4.    GRAINGER SLIDE SHOW, CASE STUDY LESSONS

I have a lot of admiration for W.W. Grainger, the industrial catalog distribution giant. They are a company that has a history of non-stop, innovative efforts. With hindsight, some may like to criticize some of their investment "mistakes", but they learn and improve from all of them. Because they fail forward, they also keep finding ways to re-generate enormous free cash flow to keep innovating.

The company is also remarkably open and transparent about what they are doing. Why is that when most distributors are pretty secretive? Here is what I have noticed about the rare open firms versus the secretive ones. Companies that are open:

  • Can precisely define what their focused strategy is and why it gives them a sustainable, unique value proposition for specific target niches of customers.
  • Can execute and innovate within their strategy very well, because they know what it is. You can’t do and improve on a strategy that you can’t describe. 95%+ all distributors could not tell you who their 5 most profitable customers are in their #1 market share niche of customers, let alone how and why that is.
  • Make a lot of money from their successful, focused strategy so that they can continue to fund innovative plans at the living edges of their market niches.
  • Know that the more they share with their competitors, the more the competitors will be distracted away from their own best value creation path by trying to imitate the superficial aspects of the story. Being one more thing to one more set of customers on an already unfocused base of activity doesn’t work. So, the successful, open players get credit for being nice guys, good industry citizens while promoting their story to the very best (potential, future) suppliers, employees, customers and investors who all want to be part of their success.

The trick to getting value out of Grainger’s openness is to look at their success stories, determine what the underlying strategic concept or guideline is and then figure out how to apply it to your number one niche of customers in a customer-friendly, value-creation way. Let’s try this three-step process while looking at some of the slides that are in Grainger’s latest investor PR presentations.

Go to this URL and first click on the June meeting slide show (we will look at some September show slides next week). http://invest.grainger.com/InvestorRelations//PubMultimedia.aspx?partner=Mzg0TVRBeE5qQT1QJFkEQUALSTO&product=MzgwU1ZJPVAkWQEQUALSTOEQUALSTO

Click on and download the June show and advance to slides 9 and 10 that are entitled (9) "Helping Customers Reduce the Cost of Indirect Materials" and (10) "Process Cost Savings". Every distributor in a mature industry channel who is selling around 90% of their sales on "old products to old customers" should be proactively defining, measuring and selling how their service offering lowers their target customers TPC better than any other competitor. Most are, instead, doing way too much product promotion, channel loading deals based on price, spiffs, or bribes of some sort. Isn’t it interesting that no one charges higher prices on stuff out of their stores than Grainger, and yet they have sold their customers on the fact that the total cost of doing business with them is less? Every distributor should be able to sell their own best target customer niches on that same concept. Put something like this quote up on the wall: "The reason our target customers/niches do business with us is that our total product-service offering gives them the lowest TPC even though they can always buy the same products on an individual basis somewhere else for a lower price."

Slide 11 "Sales Opportunity" (the integrated supply contact stats for the USPS). So, the post office went from using 1000 suppliers for janitorial products across their system to 2, Grainger and someone else. WWG’s sales to the USPS went up 50% for the year and for jan/san products 250%. But, reading between the lines, this new model program shows how WWG has wised up in the integrated supply area. Back in about ’96 when they launched their formal integrated supply, they were going after any big account that wanted to do an integrated sole supply deal. They lost a lot of money and bought a lot of education, so did all of the other integrated supply wannabees. Now, WWG seems to be focusing on large, national accounts with a lot of commercial office or very light industrial activity like the Post Office or the Pepsi bottling plants. And, they do it in an alliance with Staples, etc.

WWG doesn’t want to be the lead integrator for paper mills, for example, that need a lot of locally stocked pipes, valves and fittings, or some big automated factory that has lots of special equipment needs. Sure, they will sell all of these guys special emergency service needs as they always have with different automated twists. Otherwise, why bend yourself out of strategic shape when you can take care of other customers that would most appreciate what you already stock at hundreds of locations across the country?

How many distributors know who their strategically best customers are to pursue? If they could really name these accounts, then they could also tell you which ones they shouldn’t pursue. AND, show you a list of currently active, non-strategic, losing accounts for which they have a program to make them either profitable or force them to go to some other supplier that is better suited to take care of them. Can your firm list the strategic, the non-strategic and the shape up or out customers?

Go to slide 22 entitled "Sales Index; Phoenix versus Comparison Markets". Preceding slides point out that WWG research has found out that customers that buy from their stores want, first and foremost, "availability" or in-stock, high fill-rates. So, WWG beefed up their inventory on those items that were requested the most and the graph shows how it increased sales in comparison to other locations where traditional inventory stocking rules were being used. This is a similar strategy to what ABC Distribution did as described at the end of Chapter 1 (posted on our home page) from our forthcoming book, "Reinventing Distributor Profitability". ABC first used customer profitability ranking reports to zero in on the most profitable customers in their most productive customer niche and then beefed up the common items that this niche bought for huge productivity, profitability and sales gains. It works! Do it!

Go to slide 26 and check out "Sales through Grainger.com". WWG spent gazillions exploring many web-based strategies, and like all consumer catalog companies, they have found that web order entry for regular customers works well.

Here are a few trends to note. WWG’s year to year growth rate for web order entry sales is starting to level off at about 8% of their total sales. Most of these web sales are not new customers, but old ones who prefer to buy on the web. But, if you want to jump ahead to WWG’s September slide show and check out #21 you will find a graph showing how web customers who set up personal (reorder) lists of their past purchased items are buying ever more. All of these patterns are typical for consumer catalog companies.

WWG, however, does have many retail outlets where counter people can continue to demonstrate to customers how to set up their lists on the web site. I’m sure WWG has a number of experiments underway to find new ways to continue to reinvent web sales growth before it does level off. The key take away for all distributors is that web-enabled communication between all players in distribution channels continues to grow in many different ways. Each company will have to "push the wheel of learning" (See Chapter 1 again) with most progressive suppliers, customers and employees to find out how to make everyone more productive and continue to reduce TPC at each step through the channel.

More lessons from WWG next week!

    5.    FINE TUNING THE SERVICE (AND PROFITS) FOR WILL CALL BUSINESS

I came across some interesting service excellence measurements for drive-through windows at fast-food restaurants in a short, worthwhile article entitled "Drive-Thru Survey bags McDonald’s" at this link:

http://www.usatoday.com/money/industries/food/2003-09-29-drivethru_x.htm.

Regular readers know that I have been tracking McDonald’s comeback built around back to basic service excellence and retention economics. Well, despite a recent push to improve service, they have been backsliding in the drive through service area. QSR’s annual "Best Drive-Thru in America" rankings rated Chick-Fil-A as the #1 window performer for the second year in a row. McD’s dropped from 4th to 12th out of 25 chains. More specifically, in order accuracy for window orders, McD’s dropped from 9th to 19th. McD’s did shave 6 seconds off its time to 2:36 which was good for 5th place, while Wendy’s was #1 with a total elapsed time of 1:56.

There are a lot of different types of distributors that do appreciable "will call" business. But, I don’t think too many have really thought about:

  • What different niches of customers come to our counter?
  • What are their service metric hot-buttons?
  • How well do we do on those important metrics versus the other convenient competitors?
  • How can we re-tune our service and improve the flexibility of our staffing and our systems to be distinctive for the profitable customers that really matter in the target niches? Etc.

What types of distributors do well in counter business? All channels that deal with independent contractors and repair people have lots of potential. In those channels, there are two immediate standout types of distributors: Mom-and-Pop distributors that do well thanks to low-costs, informal systems, hard work and personal relationships built over the years. And, a few monster chains with good catalog capability that have also figured out how to replenish spoke and twig locations in a very low-cost, automated basis; WW Grainger, MSC Industrial, Fastenal and perhaps one good regional or city-wide chain of stores per channel all come to mind.

This type of business may become much more competitive if our current, borrow-to-consume our way to recovery fades. Distributors that enjoy this business or that want to specifically target it in some of their locations might do well to find out who are the best players in all of the other, non-competitive channels in their same town. Then, do some field trips to those places. Some distributors might even create some local, best-practice groups comprised of managers from the best in each channel.

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That’s all for this week! We hope to post some more of Chapter 3 in our book on our web site for next week.

Bruce

Bruce@merrifield.com

919-933-7474