October 22, 2003 - Distribution Channel Commentary (DCC) # 44

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THIS WEEKíS TOPICS

  1. YANKEES-BOSOX, GAME- 7, MANAGEMENT LESSONS
  2. ONE-PAGE BUSINESS PLAN SUCCESS STORIES
  3. WEB-BASED SERVICES TO MAKE LITTLE ACCOUNTS PROFITABLE?
  4. DECLINING DISTRIBUTION COMPANY VALUATIONS UPDATE Ė SO?
  1. YANKEES-BOSOX GAME 7 MANAGEMENT LESSONS

I donít have time to watch sports like I did when I was a kid. These days I might catch a little sports action while killing myself on cardiovascular, torture machines at the gym or watching ESPN sports highlights with early AM coffee in my hotel room while traveling. But, if itís the 7th game in the American League Championship, I will tune in for the last few innings if I can.

This past week I gained three lessons from watching the 7th through the 9th innings of the last game of the Yankees-BoSox series. When the playoff season began, I was intellectually hoping for a Cubs-BoSox World Series. Wouldnít it be great to end some of the 180 years of combined suffering for Chicago and Boston? Donít you think that the entire nation could have been intrigued and distracted from tough times? And, it would have even be good for baseball and TV ratings. But, much to my, and my kidsí, amazement, I found myself audibly groaning about the Yankees being down 4-2 and then 5-2 going in to the bottom of the 8th. Then, I was gleeful when they came back to tie in the bottom of the 8th. (In a brief moment of sanity, I went to bed at the end of the ninth and missed the 11th inning homer for the Yankee win.).

What was cheering for the "Damn Yankees" all about? Lesson One: historic, emotional baggage triumphs over current strategic sense.

Before Yankee haters write me off, please be empathetic with the brainwashing of my youth. I moved to a NJ suburb of New York City in the spring of my first grade year in 1957. At recess, we always played pick-up baseball and my new friends were all arguing about who got to pretend to be Mickey Mantle, etc. I didnít have a clue as to who they were talking about; I didnít even know that there was major league baseball. But, from then on through seventh grade, it was all Yankees, Tops Bubble Gum card collecting, etc. Imagine the huge, quiet, emotional struggle that I had in the fall of my 8th grade year when once again I was a new kid in a new school, this time in St. Louis, when the Cardinals beat the Yankees 4-3 in the í64 series.

What do years of emotional programming triumphing over intellectual common sense have to do with improving the profitability for any company in a mature industry? My commentaries, my high performance video, the first three chapters of my forthcoming book (posted at www.merrifield.com) all include one big idea. The big idea is to significantly reduce the pushing of too many products to too many different types of customers while simultaneously increasing the creation and selling of one-stop, lowest total procurement cost solutions to one niche of customers at a time. And, there should be special, total-team focus on the 5-10% of the customers in any targeted, mature-industry, customer niche that will provide the best, long-term profit streams.

This big "paradigm change" really works, but it has trouble getting any traction in the face of the channel, product promotion culture. In just dollars and sense, consider that most consumer goods manufacturers spend about 20% of their sales dollars on channel promotions. In the US, all channel promotion expenditures are estimated to be over $700B per year. Channel players just keep doing what they have been doing, which means that most of them will continue to get less of what they have been getting as far as profitability goes.

If any of you are as frustrated with how hard you are working for how little you make (something akin to what BoSox fans must be currently feeling), then you might read Chapters 1 Ė 3 of my forthcoming book which are posted under the red star at www.merrifield.com.

Lesson two was provided by the negative role model performance of the BoSox Manager, Grady Little. He proved to be a crisis mode manager instead of an anticipatory or reactive one by waiting to take out his Ace pitcher, Pedro Martinez, out until the game was tied 5-5 in the bottom of the eighth. In modern baseball with mid-game relievers and ninth inning closer relief specialists, why spare fresh power and a new look for the batters in the last game? Mr. Little could have been an anticipatory manager at the end of the seventh by telling Pedro he was magnificent but that he would not be going out for the 8th. Pedro had been showing signs of fatigue in the bottom of the 7th. He could then have substituted the best of the rest in the eighth. Mr. Little could even have been a reactive manager by taking out Pedro when he first started to get into trouble in the 8th, but instead he asked Pedro what he wanted to do. If Pedro had quit with the tying run at the plate and walked off the field in the middle of the 8th inning it would have been especially embarrassing to Pedro which leads into lesson three further below.

Contrast Mr. Littleís actions to Yankee manager, Joe Torreís comments about yanking 6-time Cy Young winner, Roger Clemens early in the game:

"He battled," Torre contended. "But he didn't have good stuff. He looked like he tried to muscle it a little bit. Emotionally, he was fine."

Clemens, the former Red Sox star who is retiring at season's end, had won his last five decisions, yet Torre wasted no time yanking him. "We're trying to win a game," Torre explained. "The leash is short when it comes to Game 7." "We had everybody in the bullpen."

Are we anticipatory managers like Torre or crisis mode ones like Little? Do we believe that an ounce of strategic re-thinking prevention is worth a pound of profit improvement cure? Or, are we so lean and mean and trying harder that there is no time to think about that? What will be the cost of curing problems in the reactive or crisis stage like US Foodservice and US Flow are experiencing (in topic four below)? If we keep on doing what we are doing as the competitive world changes around us, isnít it likely that we will be more and more out of tune with the value creation best customers want? Wonít our profit power continue to fade? Is cutting costs, trying harder going to lead to creative progress?

Finally there is lesson three which has to do with the ego needs and responses of our key playersí under pressure. Why would Pedro have been especially embarrassed at being removed with the tying run at the plate in the 8th? Some background: he was out pitched by Clemens and lost both game three and his on field cool. During a bench-clearing melee, he threw 72-year old, assistant Yankee manager, Don Zimmer, to the ground and injured him. Zimmer publicly and tearfully apologized the next day to all parties for charging the pitching mound; Pedro said nothing.

So, what do you think Pedro is going to say to his coach out on the mound in the middle of the 8th with the hold world and a stadium of jeering Yankee fans watching? Whatís any competitive guy going to say?

"Oh thanks for coming out here Coach and letting me off the hook, I was getting a little scared, tired and tight with all of this pressure and the hostile fans. I wonít care if they jeer me as I head for the dugout, I will still be proud of losing the third game and my manly throw-down of that old geezer coach."

I donít think so! All things considered in Pedroís case, most pitchers would have needed to believe that they could take it to the next level and chosen to stay in unless they were injured. After the ensuing, three quick Yankee runs, Mr. Little then got to be a crisis manager for the next few innings and lost the series to keep "the 1918 curse of the Bambino" going for the BoSox team and fans.

Do we make similar requests of our key players in both management and sales planning meetings? How will they respond to: "Can you step it up, take it to the next level, make the numbers? You know, we are counting on you!"

Can you imagine any of them saying: "Gee, boss, I donít really know what else to do, but just keep doing what I am doing as best I can. Iím so caught up in our corporate and channel culture rules, incentives and activities that I canít really change anything even if I intellectually knew what things I should be doing differently. Besides, you keep the activity demands so high and the budgeted resources so low, there is no time or room to mess around and try some cheap experiments that might lead to some new creative solutions."

I donít think so. Our key players will sound off like good soldiers and tell us what we want to hear: "Iím your man; Iíll get the job done! (If you are really motivational, Iíll try harder for about two weeks)".

If we are going to come up with important, creative changes that will truly reinvent our profit power effectiveness, wonít we have to discuss big change possibilities that have the potential to deliver big gains? Donít big changes take some time to really understand and comfort zone? I, for example, couldnít overcome years of emotional identification with the Yankees with a one-minute statement about why a BoSox-Cubs series would be good for America. This theme of how do we allow our key managers and sale reps the time, repetition and assurances to comfort zone new strategic viewpoints will reappear in most of the topics that follow.

FINAL THOUGHTS

In all fairness to Mr. Little, Iím sure he made many good decisions during a successful season and the three wins his team did get in the series against the Yankees. But, isnít turning someone elseís occasional poor decision into our positive-lesson gain the most affordable way to grow our wisdom?

As for the "Damn Yankees", whether they beat the Marlins or not, I suspect that they will continue to spend more payroll dollars per win than anyone else in baseball. And, the best positive role model lessons in baseball may continue to come from the Oakland Aís who have been spending the lowest payroll dollars per win and still making the playoffs. (See April 30th DCC #22.1 entitled: "Payroll $s/win: Yankees vs. Athletics")

    2.    ONE-PAGE BUSINESS PLAN SUCCESS STORIES

Last week I plugged my latest article, "A Strategic Time Management Assignment", which explains a process to get to a one page summary report for about 15 key accounts per location. This report will eventually get management and key sales personnel to achieve the greatest profit growth return on invested time possible. Hereís the link to the article: 2_20.asp

I got some email responses from readers with both questions and success reports regarding the one-page report drill that I think are worth sharing. One chap reported that of the three types of accounts included in the one-pager Ė core, target, and lead-to-gold losers Ė he has had best results with targets; they are up 51% in the past 9 months. But, you have to know this guy; he is a serial entrepreneur who loves calling on big new prospects, and he is an early user of our video, "High Performance Distribution Ideas for All". In the video, modules 3.3 to 3.7 get into the how toís for target selling in great detail. (For 40+ pages of promo material, click on the links in the middle of our home page.)

If any readers would like the verbal story on the target selling how toís for free and now, check out the following references at our web site. In the upper-right hand corner if you click on "all commentaries, you can then click on both 7 and 9 to find:

DCC # 7.3 "Where are we going to get new growth"

DCC # 9.3 "Team focusing on key accounts: next level ideas from readers"

And then, back on the home page, if you click on the "slide show" button along the top, you will see a number of heavily, annotated slide shows. The top one is entitled "Cracking target accounts". Here is the direct link: Cracking_Target_Accounts.pdf

A second client has focused most heavily on "selling more to his core by Ď04". Because he is an industrial supply type distributor in a more rural area, there arenít a lot of new accounts for him to go after. So, they have not only been keen students of the video, but the following DCC snippets of advice:

DCC # 13.2: "The wisdom of 10 x 10 selling; four levels of results

DCC # 8.3 "Fill-rates as an organizing theme- case study"

DCC # 10.3 "Let Customers strategically managed your core inventory"

DCC # 22.5 "Math for More to Your Core by Ď04"

Two specific breakthrough patterns that they have achieved have been to get a lot of new, third party logistics supply business. A few of their best customers also buy goods direct to receive and store them in their central receiving area. A lot of this activity has been "outsourced" to our distributor friend. His firm now charges fees to receive, store and then deliver these still-bought-direct goods to their final consumption points inside the plant.

A second concept that they have exploited is to establish new "deep-to-deep" connections between their team members and the target customers internal team members (from module 3.7 in the video). By getting the distributorís inside sales reps and buyers out to see their counter-parts at some big customers that do a lot of just-in-time, mass-customization production work, the new customer friends now call their distributor people directly for Price and Availability information instead of going through the purchasing department.

Because the estimators also have the (new) power to place an unofficial order on the spot via fax, the drop ship response time is faster than waiting for the official PO document to be faxed. The customers are quoting their customers faster; improving delivery times on jobs won; and ordering more from the easiest supplier to do business with. The distributor has gained old account share as well as all of the new win business from these few, target accounts.

In past DCCs, we have also covered two case studies in which two different distributors finally got some successful results at converting big losing accounts into big winners. Of the three types of accounts to manage, this group provides the potentially biggest, fastest profit improvement opportunities, but is the most avoided opportunity. For courage and hope, check out these past DCC topics:

DCC # 12.3 "RONA Trend Ranking Reports for Branches Open Minds.."

DCC # 39.3 "Case Study: How to Crank a Customerís Contract Price by +10%"

DCC # 40.2 "Follow-Up on Last Weekís Raising Prices on Losing Contracts Case Study"

    3.    WEB-BASED SERVICES TO MAKE LITTLE ACCOUNTS PROFITABLE?

Any distributor that has done customer profitability ranking reports will find that there is a large group of small customers that order small, perhaps infrequent orders on which the company may lose money. The problem is that the costs of the traditional wholesale services involving formal Ė paperwork, picking, packing, delivery, trade credit, plus surprisingly, variable, overhead allocation costs Ė all exceed the margin in the order. These customers are actually giving distributors retail-sized orders, but are getting both wholesale prices and full service.

We could improve our economic terms for these accounts by: raising minimum order sizes for this class of customers; charging retail-less prices; and adding transaction and/or delivery fees. Wouldnít it be great, though, if we could get these customers to enter their own orders through a web site that helped them to generate fewer, but larger average orders and buy more total annual volume? For inspiration, you might go to the WW Graingerís September slide show for investors and check out slide #21 entitled "Services: Personal Lists and Sales". To find the slide go to the following link, click on the September slide show event and then click through to slide 21 (the rest of the show is also very educational!): http://invest.grainger.com/InvestorRelations//PubMultimedia.aspx?partner=Mzg0TVRBeE5qQT1QJFkEQUALSTO&product=MzgwU1ZJPVAkWQEQUALSTOEQUALSTO.

What the slide suggests to me is that as repeat customers build their personal lists for their repeat items, they help themselves to systematically buy more and more per order, because they do have an incentive to consolidate their orders to save on multiple transaction charges.

Grainger is a $4B catalog seller that can afford its own integrated web site along with the personal list feature. What could a little distributor do for a first step to get any and all customers to do some of the order entry work and build both average order size and annual volume?

Hereís a hypothetical scenario. We find a "web service provider" that sets up a stand-alone site that doesnít offer an integrated, web catalog. It just has a password-protected access to a personal list for each interested customer. This personal list could include every unique item that they have bought for the past 1 to 2 years trailing along with consumption history usefully formatted. They could rank items by cumulative volume bought, dollars spent or frequency of purchases. There would be columns that calculate a monthís supply of the goods, assuming that they bought all of that items needs from us over time, and another column might show how many units come packed per case and how many months supply a case was equal too.

The goal would be to get the customer to have a re-order format that would help them to order the right items in the right amounts at the right frequency (every two weeks, four weeks, etc) to minimize:

  • their order placements (and concomitant paperwork costs)
  • service charges
  • on-hand inventory and emergency stock out problems

For us, the happy byproduct would be larger average order sizes and more share of the customerís total spend. We would win by turning losers into winners by lowering total sales/service costs and increasing volume. Customers would win by lowering their total procurement costs.

To turn customers on to this opportunity, we would probably do the up-front analysis and list creation work for most customers, then pre-load the personal re-order form from the office before we called them up to walk them through how to use it. We could "push the wheel of learning" and "do cheap experiments" (more on these concepts in Chapter One of our forthcoming book at the web site) by doing these re-order forms in hard copy that guinea pig customers could fax in.

If we scaled to an actual web service capability for potentially any and all customers, the actual orders would have to be e-mailed to the sales desk for re-entry and call-backs, if there was a short on the order. Customers would still have to call in new problems and item needs. But, all new items could be added to the personal list as often as was needed.

This type of service might be especially effective for distributors who sell the same formulaic, consumable supply products to lots of small customers. Distributor examples that come to mind are: foodservice, Jan-San and industrial packaging, office supplies, physician and dentist supplies, etc.

If anyone has an interest in finding such a web service provider capability, let me know. I know of a number of software firms that have total, integrated, web site catalog, order-entry offerings. They could easily split off the order entry into a personal list feature. One software solution service could potentially serve a lot of different types of distributors. The software vendors might also consider charging a monthly fee for the service that would vary with the usage value that a distributor might get from the service.

If anyone is concerned about whether customers might not be interested in doing it themselves, think how the airlines and the grocery stores are currently training all of us to do things on our own. I canít remember when I last ordered a ticket from a travel agent, we book our own e-tickets over the net. I check my own bags and print my own boarding passes at the airport. I often scan my own groceries, and now grocery stores are experimenting with carts with scanners right on them that do all kinds of extra services. For a great read on the cart scanning services (the next big DIY techno-service?) check out the article entitled "Replacing the Checkout Line; Grocery Chain puts shopping-cart computers to the test" at this link: http://www.boston.com/dailyglobe2/290/nation/Replacing_the_checkout_line+.shtml

4.     DECLINING DISTRIBUTION COMPANY VALUATIONS UPDATE Ė SO?

I have previously written in this DCC series about the declining valuation rates for distribution companies and what this might mean for present owner/operators eventual exit strategies. For new readers, here are the previous comment locations:

DCC # 4.2 "Whatís my building supply company worth?"

DCC # 4.3 "Why valuations are dropping"

DCC # 24.2 "Sinking dollar and distribution valuations- case study"

Some recent news that I have seen on some of the big, roll-up distribution companies just adds to the declining valuation story. Here are a couple of news items with observations:

  • US Foodservice Group (owned by Ahold of the Netherlands) as of 10/17 has totaled profit overstatements that now approximate $1B; "goodwill impairments" of about $3B; and the sacking of 20 top and middle management executives. These totals started out as some "accounting irregularities concerning year end supplier rebates" with the immediate firing of one scapegoat manager. I assume the biggest cause for the goodwill write-down may be to reduce the ridiculous prices USF paid for its latest, biggest acquisitions back in Ď99-00.
  • US Flow Corp. of Grand Rapids, MI was a 1999 roll-up of pipe, valve and fitting distribution companies. They were paying 120%+ of book value and/or "EBITDA" multiples of up to 20X just 3 to 4 years ago for independent distributors. Their peak sales were about $340MM. But, with too much debt, too little value-added service management skills, and a softening economy they filed for Chapter 11 bankruptcy on August 12th. What is more telling is that they then had to resort to a Chapter 7 liquidation. We might infer that: a) they couldnít get sufficient operating loans; and, b) they couldnít sell any of their acquired companies for even true liquidation value (80% or less of book value?). If the creditors have an auction liquidation, what does that say about valuations in that particular channel?

I have written a number of comments on the US Foodservice story with a central theme being how much "rebate rot" was in all channels. The publicly traded roll ups have been under great pressure to produce earnings fueled by rebates to try to:

  • Justify the ever higher prices they paid for deals into 2000
  • Service their deal debt and comply with loan covenants
  • Support management claims of achieving mythical synergistic, economies of scale
  • Maintain their stock price above distressed levels.

For quick reference, here are the locations for those former commentaries:

DCC # 14.2 "US Foodservice; key account rethinking" (warning suppliers to stop pursuing them)

DCC # 15.3 "How extensive is rebate rot within all distribution channels?"

DCC # 18.5 "Follow ups on rebate rot"

DCC # 25.3 "Rebate Rot III

DCC # 26.1 "Rebate Rot cure; "fees for service" article

What does this all mean to the average distributor? One sub-group of distribution CEOs that might take notice of the valuation trends is the group that is planning on selling out to the next generation of managers (and/or family members). What if the companyís projected free cash-flow is not sufficient to both buy out the exiting shareholders and finance a minimum growth rate that will keep both good employees and suppliers contributing their best for mutual growth and gain? Iím going to guess that 95% of companies with succession/buy out plans that included a now overly optimistic buyout price donít have the cash-flow projections to finance both needs. And, the other 5% must now wonder if the next generation will be able to maintain the current, satisfactory level of cash flow considering the tough, prolonged economic environment we seem to be in.

If you are one of those companies, what should you do besides having a "strategy of hope" that:

  • An improving economy will lift a mature channelís average profitability when there is about 25 to 30% excess capacity in most every channel.
  • The global trend for deflating costs for produced goods will stop or reverse.
  • The US trend for inflating service personnel costs starring healthcare costs will stop.
  • Trying harder in the same way while cutting costs around the edges will some how create a customer-value, profit-improving, competitive advantage. (It may help you survive, but not thrive to the point of affording a good exit strategy.)
  • Big consolidation buyers will come back with good buyout offers when no one wants to own shares in or buy the pieces of the big chains that have already disappointed everyone.

I think the answer is to fundamentally rethink your companyís strategy around the ideas of:

  • Measuring customer profitability and pursuing a number of related profit improvement plays.
  • Targeting one customer niche at a time for #1 share ownership.
  • Special total team focus on the 5 to 10% of the customers that will generate 80% + of the profit power in the niche for some supplier(s).
  • Making every employee part of the profit power solution or they will be unknowingly part of the problem.

(The draft of Chapter One of our forthcoming book offers a lot more detail on these ideas and how to "Reinvent Distributor Profitability". If you want to read a great story on how to grow an "intrapreneurial" high performance business and then deal with the simultaneous problems of buying out the old guard, while financing on-going growth to meet the needs of the new guard, see my review on a "Stake in the Outcome" by Jack Stack at DCC # 4.1 "A Stake in the Outcome.")

Because the strategy ideas above are individually and collectively revolutionary, they are not easy to implement. On the other hand, big profit power gains will require big changes, not incremental fine-tuning of the past. It will take time and a lot of "what if" discussions with key managers and sales reps before a committed, majority in favor of taking action emerges. Some will not change and will have to go, often through self-weeding if numbers and implied, individual responsibilities are widely shared.

The educational and discussion needs for a strategy reinvention process can be huge, but our "High PerformanceÖ" video provides a total solution in a box. Many of our re-sellers sell it for about one hour of my consulting time costs. But, to take advantage of this tool a company has to:

  • See the bigger, long-term need to stop hoping and start discussing reinvention.
  • Order the video that comes with a 30-day, money-back guarantee
  • Spend 30 minutes looking through the materials.
  • Decide that weekly, one-hour discussions with key people, and eventually all employees, is a worthwhile sweat equity investment.
  • And then act with the assumption that the courage and enthusiasm to embrace high performance methods will follow.

Thatís all for this week. Hope everyone is having a beautiful fall as we are here in Chapel Hill!

Bruce Merrifield

Bruce@merrifield.com

919-933-7474