October 29, 2003 - Distribution Channel Commentary (DCC) # 45


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Clients have asked me if I have changed my mind on the "post-bubble economy" now that the economy is hopping and the stock market is back. I havenít. Below are three sets of references that tell me tough times will continue. For starters, I have been a fan of the views of Stephen Roach, Morgan Stanleyís global economist, for several years. He has been consistently right for two+ years using his global structural analysis; meanwhile, 90%+ of U.S. economists have been very wrong using their US-centered, cyclical, analysis approaches.

Mr. Roach posts his thoughts on the Morgan Stanley web site on Fridays and Mondays. Last Fridayís post was a nice, two-page summation of the battle that is currently going on between global structural problems and the US governmentís best efforts to borrow our way into a sustainable, self-fueling cyclical upturn. Hereís the link: http://www.morganstanley.com/GEFdata/digests/20031024-fri.html#anchor0

(P.S. Mr. Roachís Mondayís (10-27) post is also worth reading. It covers the "global e-arbitrage for labor" between high cost countries: especially China (for manufacturing) and India (for ALL professional services). Outsourcing to cheap countries is old stuff, but there are some profound and obviously huge differences with these two countries (size, education, speaking English in India, scale and scope of their offerings, and the internet). The convergence of their wage rates with ours will have a long-term and still accelerating effect on U. S income growth that is struggling to service rising debt mountains at all levels. The link: http://www.morganstanley.com/GEFdata/digests/latest-digest.html#anchor0


Donít you use sleep at night wondering: how come the broad money supply in the US has declined in the past 12 weeks by $37B (1.9%) annualized, but long term bond rates keep dropping from their summer peak in spite of all of the government and mortgage borrowing going on? In contrast, the M3 growth for the 12 week period before this last period (April 28th- July 21st) was $220B (11% annualized).

If you actually havenít been losing sleep over this paradox, hang with me to look at the graphs that might start to unravel your responsible-tax-paying-citizen socks, if not blow them off. It turns out that the alternative liquidity source for our sugar-high recovery appears to be coming from the "Government Sponsored Entities" (GSEís), Fannie Mae and Freddie Mac in a seriously accelerating way.

For the past few years, the two GSEs had been buying about 40% of all of the mortgages originated by banks, credit companies, etc. to then repackage them in mortgage-backed bond pools that are sold to institutional investors world wide. Both GSEs have been steadily buying some of their own manufactured bonds (especially the ones that are under subscribed, making them the buyers of last resort). The GSEs make about 80% of their reported profits off the difference in interest rates paid on their IOU bonds and the higher mortgage backed ones. They both have debt to equity ratios over 50X, so they really are leverage hedge funds in disguise.

When long term rates go up all of the GSE bond investments drop in value. What better way to prevent long term rates for bonds and mortgages to go up, then buy as many mortgages as necessary. This also puts continued liquidity into the marketplace to offset debt being paid down by businesses. So, now the GSEís are also the buyers of first resort for the biggest risk mortgages you can imagine.

Now, for the pictures that tell 1000 words, check out the two graphs at the top of Doug Nolandís 10-24 "Credit Bubble Bulletin" at this link: http://www.prudentbear.com/creditbubblebulletin.asp

For the mechanics of what the GSEís have been up to skim through Nolandís bulletin in the sub-section entitled: "Correction: Fannie AND Freddie Liquefy the World". It may take 2 or 3 careful reads to begin to understand what is really going on, but I think it is worth every strategic thinking executiveís time to read this. When this scam finally blows it will make the S and L debacle of the early Ď80s look like chump change.


A third area of economic news that speaks to me in a bigger-picture, forward-looking way is what is coming out of California which accounts for over 20% of the U.S.ís GNP. First, I am waiting to see what the Governator-electís audit will reveal; Iím expecting more negative surprises.

Secondly, some interesting real-time, economic indicator data came out last week with negative inferences for: lost jobs, dropping tax revenues and declining property values in California, check out the one-way U-Haul rental rates between city pairs in and outside of California. Hereís a link to a short, fascinating article entitled: "Itís Arnold and the ĎU-Haul Indicator": http://www.nationalpost.com/financialpost/story.html?id=8CEAAF35-74A0-43B8-A38C-E2982A3B3533.

And finally, as I am typing this early on Tuesday morning (10-27), parts of S. California are still going up in flames waiting for the weather to change. My brother, Marshall, who is the CEO of a $125MM security hardware distribution business based in San Diego, donned his gas mask on Sunday night to deal with dense smoke while entering his headquarters building to get all of the corporate computer back up files. He has since informed me that San Diegoís finest held the fire at bay 200 feet from the building, but their SD warehouse has been closed due to poor air quality. Given all of Californiaís fiscal problems, huge losses in business and business productivity are not costs the stateís economy needs right now.

Whatís my final U.S. economic summation? These are and will continue to be tough times with volatile financial markets. Letís not be guilty of "optimistic thinking" that will blind us to the big global structural economic problems or, the new wrong-way trend data that might appear in places like GSE balance sheets or in California. Letís be instead "optimal thinkers" who see all that is really going on and then deal in the best way possible with what we can control as opposed to what we canít.

Regardless of our global, national or state economic backdrops, I think 95%+ of all distributors in mature industry channels have the control and the opportunity to:

  • Boost personnel productivity 50 to 100% measured by gross margin dollars/full time equivalent employee
  • Increase operating profit margin dollars by full percentage points of revenue
  • And, "sell more to their core in Ď04"

How? The first three chapters of our book will get you thinking down new profit power paths, and our video, "High Performance Distribution Ideas for All", is a total educational, how-to curriculum in a box. It can be purchased for a nominal cost from our re-sellers with a 30-day guarantee. Check out the 40+ pages of information on it behind the links in the center of our home page. If you donít see a re-seller on our list that you are affiliated with, then inquire about how easy it is to set up one of your affiliation groups as a re-seller.


Iím sure most of you have seen basketball games in which late in the game, a superior, winning team starts to play a slow-down offense to run out the clock. The other team then comes storming back and sometimes wins when the better team canít get their normal offense back into gear. Ditto for football teams who go into a "prevent defense" to give up short passes, but not the long scoring ones. Doesnít it make you wonder if it wouldnít be better to keep playing to win instead of worrying about how you can lose?

Most of us have gone into "prevent defenses" during this post-bubble economy. We just keep cutting back expenses to survive, while trying to do the same profitless activities with fewer, lower paid folks. The problems with this scenario are:

  • 95% of us that are trying to survive donít have a unique, value proposition to begin with. We arenít better than the competition with a scoreboard (cash-rich balance sheet) lead.
  • The global economic headwinds touched upon in the links for topic 1 above arenít going to be over in 5 minutes for a win. They will continue to increase and be with us for a long time.
  • The best stakeholders Ė employees, outside investors, suppliers and customers Ė will get disappointed by the lack of new value creation benefits and will take their proactive resources to other better competitors. The weakest will stay for lack of any better alternatives, but they arenít going to reinvent our commonwealth future.

How should every mature-industry company facing too much profitless competitive capacity reinvent their (service) value competitive edge? How should we play to win instead of cutting costs to survive, but then die of progressive talent starvation? Here are a few guidelines:

  1. Rank all customers by estimated profitability and look for the 5 biggest ones in the top 10 or so that seem to have the same homogeneous set of product and service needs. They are the heart of the companyís #1 historical, best, most profitable niche of customers, and they will help us to co-create the next level, breakthrough total best value proposition for them and all others in their niche.
  2. The best, living-edge customers in our #1 niche will also help us to move towards total solutions that will give them the lowest total procurement cost and to us the lowest total sales service cost. We can co-create a structural, economic equation in which: the customersí value > our price > our costs = premium profitability for our industry group.
  3. To experiment, test and execute our way to our new equation, we will need every employee to be part of re-thinking our inter-departmental service processes, our personal skills and flexibility to make sure the service metrics happen even during high service demand surges.
  4. These action steps might sound overwhelming, but a long journey begins with a single step. Whatís our next best alternative?

Why and how to do the journey (along with "strategic maps") are all in our book, video and past DCC topics. The book provides a process that will allow every distribution location to find its own best strategic profit power starting kernel and go from there. No more top-down, monolithic product promotional activity for all locations as "Rollups, Inc." did in one of chapter threeís case studies.

Implementation guidelines can also be partially science, but there must be local, emotional, organic accommodations. In that vein of reasoning, here are some thoughts:

  1. Good transition management must involve lots of discussion about why and how we need to change in order for to old, unspoken cultural religious beliefs to surface and melt away.
  2. Final solutions can not be textbook perfect. They will be a compromised blend of the old and the new. What is important is that the new way is much better than the old and whatever the competition is not doing in spite of what they may know, say and wish they were doing.
  3. Organic, socially emotionally sensitive solutions that emerge will be better than swift mechanical fixes starring new incentive plans that may well foment a revolution.
  4. When new stuff is discussed, use the "wheel of learning" to zero in on quick, small, cheap experiments with all parties involved. Lower expectations for "the experiments". Let everyone know that we will "fail forward" toward our vision. (The "wheel, cheap experiments, good mistakes" are all covered in chapter 1 of our book posted on our web site.) Remind all participants that Thomas Edison wanted to see how many experimental failures he could conduct in 24 hours. He tried, for example, thousands of different substances for his light bulb filaments. (For a short inspirational story on Edisonís invention process that involved quite a team go to this link: http://www.ushistory.net/toc/electricity.html)
  5. What type of leadership and intrapreneurial talent will be necessary to start playing to win? The leadership mix will be different than that for the project captainís mix. The CEO will have to be the head intrapreneur who may openly announce a "feel our way along" philosophy. But, when it comes to appointing a new "service manager" to oversee the continuous improvement of targeted and tuned service metrics, a rookie new to the industry with rudimentary management capabilities could do (see topic 4ís case).
  6. The key thing is to start the educational, comfort zoning process and act on some cheap, but thought out experiments. The courage will follow as more and more employees begin to get excited about creating value for all.

Itís times like these that we have to turn downward, defensive, vicious spirals that come from "prevent defense" reflexes into virtuous, reinforcing, creative, upward spirals that deliver new levels of niche-targeted, service value.


An early, enthusiastic user of our "High Performance. . ." video is doing so well (in a channel were many others are not), he was able to recently buy another company in a contiguous area. He recently checked in for ideas on two problems that he had:

  • Who should lead "all" (?) of the video training modules for all employees at the new location? He had done it himself at his main location on a crash basis with four, early-AM sessions per week, per module! His company wasnít yet big enough to have an internal employee educational staff to delegate such problems to.
  • And, who should he Ďpromote"(?) to the role of "service manager" at the new location to help the order fulfillment departments Ė inside sales, warehouse and drivers Ė make perfect service happen? For readers unfamiliar with the "service manager" role it is covered in the "High Performance" video module #4.4, as well as touched on in this article link at our site: 3_9.asp

Because his new acquisition happened to be near one of several colleges in the US that offers an "industrial distribution" undergraduate degree program, I suggested a "cheap experiment". (Here is the link for info on many of these college programs: http://www.ptda.org/students/idschools.shtml)

Why not call up the department to see if they had:

  • December graduates looking for full-time employment.
  • Current best-in-class students who might be looking for consulting work with a distributor for a pay that might lead to a job.
  • A way of staying in touch with past graduates who were two+ years out and looking for new employment opportunities with progressive distributors in or near their home town.
  • (And, other options on how a regional distributor might work together with one of these school program directors.)

The idea was to start the process of finding an eager, unbiased person who is willing to watch hours of video and read pages of an "Implementation Guide" in preparation for "facilitating" (not "managing") the service improvement challenge. This team helper could do all of the time-intensive background and data gathering work such as debriefing everyone along a service process and creating a first approximation flow chart as a discussion agenda. (See this link for this personís survey questions for doing the flow-charting: ./exhibits/processx.asp
and, video module #5.11
). The new assistant could also start to "experiment" with ways to measure, track on a spreadsheet and post the metrics for the "big 8" (+/-) service numbers (for more see: ./exhibits/8elements.pdf ;or, video modules # 4.1-4.13). Then, with real data on a graph, the team could use the wheel of learning to discuss what operational change experiments they might want to try.

After a new, intrapreneurial champion (in disguise) gains operation understanding and group trust, then they might help with some of the video training. But, I still recommended to my client that he be the one to initially lead discussions on all of the big change modules with the key people, even if some were done via teleconferencing. (Watch the videos and do the homework on your own, then we will discuss via the phone.) If the key people at the new location donít buy into the change wholeheartedly, then it isnít going to happen, especially at a remote location. (See topic 4 for how best sales reps might be the transformational leadership team within a team.)

What general problems and solutions might many distributors see in this case? When you are lean-and-mean:

  • Where do you get the extra project/champion/intrapreneurial talent to follow up on what a key group of employees might think are good cheap experiments grounded in good strategic analysis?
  • How do you fund this talent?
  • How do you get eager, unbiased, book-learning-oriented people operationally educated as fast and affordably as possible.

The hero in this case study turned his business around on a bootstrap basis with the video solutions for:

  • Turning biggest losing accounts into winners
  • Managing lots of small order customers from being slightly unprofitable to solidly so.
  • Selling a lot more to his best accounts due to total, team focus and selling methods.

These solutions allowed him to shrink his payroll count, still have extra personnel slack and make a lot more money at his first location. But, at his acquisition firm, there was no real talent that he could first free up to then re-deploy, he needed to inject some new outside talent. We will see if he can find the right talent solution at the local college and keep you posted.


A top 3%-ile distributor whom I first advised back in the mid Ď80ís, recently invited me to "dialogue" with the top 15% or so of his sales force on "Next Level Moves with Seabiscuit". The CEO had recently read through:

  • The first three chapters of our forthcoming book, and
  • The "slideshow on "Cracking Key Accounts" at this link: Cracking_Target_Accounts.pdf

He had zeroed in on a few key points:

  • Why were sales reps not particularly adept at taking core, target-gazelle and big losing accounts to the next level of performance? He intuitively sensed that his best reps could make next level stuff happen with the right: education, motivation and total-team selling support.
  • He liked the idea of freeing up and re-assigning the bottom 50% of the accounts in many of his sales reps territories. He agreed that fresh, bold starts with a new team approach could be highly effective. This concept play is covered in slide #11 of the slideshow listed above.
  • Using the jockey-horse analogy, he reasoned that they had the most to economically gain or lose with the strengthening or weakening of the horse they were riding. They would invest extra efforts to have a winner like Seabiscuit.
  • And, he felt his elite reps were the best potential change leaders in the organization. They were smart, pragmatic, experienced, flexible, optimistic, experimental and persuasive in comparison to both the bottom 80% of his sales force and his internal administrators. If the best reps were behind something, everyone else would follow.

To help us create an agenda for the meeting, he offered some additional background info on the company:

  • The company has grown organically over 6-fold since 1985. Although they were still out-performing the economy and their channel, they were decelerating and wanted to regain their old growth rate.
  • Profits had gone from excellent to OK. Although management did not share the final profitability numbers with all employees, the sales force was conscious of transactional economics because it was part of their compensation plan. The company had an incentive plan that resembled the one covered in our "High Performance.." video module #3.10 (or slide #118 in the Implementation Guide).
  • They were not keen on moving to a new incentive plan. They werenít opposed to pointing out how the current plan and growing company profits to reinvest in a bigger, better horse might be a bit out of alignment. But, tinkering with the plan was small potatoes compared to the mutual upside of growing key account much better.

The final agenda was a blend of :

  • Why we all need to be responsible, proactive jockeys for Seabiscuit (or "commonwealth capitalists"- DCC 18.3; also the entire section two of the video).
  • Profitability per customer conclusions and actions.

Explanations that were totally empathetic with the sales rep of the slides in the following two posted slide shows on cracking target accounts and selling a reinvented distinct value added service proposition: Cracking_Target_Accounts.pdf Dist_VAlue_proposition.pdf

What were the results? During the meeting it was a bit surprising to find that the sales reps agreed that most of their customers were under a lot of pressure to "buy the same old commodities better". But, they were not "total procurement cost fluent". So, we hit that area hard concluding with the importance of on-going case study learning and why the sales reps needed to support the internal efforts to continuously improve the "big 8 of service excellence".

(P.S. One web site that is dedicated to creating, selling, measuring and getting paid for service value and/or lowest total procurement cost is www.valueaddedpartners.org. For a recently posted case study on how an industrial distributor taught its sales force to document and measure cost savings check out this link: http://www.valueaddedpartners.org/articles/articles_TrainingThatWorks.asp)

For "criteria for target accounts"(slide #4 in the "cracking account show") we added the importance of which competitor was currently the #1 competitor. They did have one competitor that was quite tough in some of the same niches, but another one that was imploding. All things being equal between two potential target accounts, chose the one in which the imploding competitor was in. (Sometimes a best firm can poach a best outside and/or inside person/pair etc from the worst who can then switch the best accounts. No need to buy a failing company in which 90%+ of the people, accounts, inventory, etc is a net negative value; just cherry pick.)

And, they all got on the hook when discussing the implications of slide #11 in the "Cracking Target Accounts" slide show. As a group, they subsequently decided to create a pool out of the bottom 50% of the accounts in all of the sales reps territories that generate less than 10% of the compensation, but take 30% of the rep and or the internal service peopleís time. These accounts were then sub-divided into two groups:

  • Marginal, growing no-where accounts that could be bought out by the company and switched to tele-sales or house service coverage and terms.
  • Potential target accounts that had been with the assigned rep for longer than a year and might respond to a new face combined with bold, total team selling support.

Finally, they were all sold on helping anyway they could to do whatever it took to make things happen for the good of the companyís most important core, target and losing accounts.

The CEO was pleased. He has total confidence that by focusing his best reps on the best upside potential accounts with everyone elseís team support, new growth will happen. He also expects that the rest of the organization will follow the leadership of his key sales reps who want to help Seabiscuit win big time.


I use www.Google.com a lot, and my web site loves Google too. Our web stats inform us that a lot of our visitors come through Google searches. To make www.merrifield.com come up higher and more often on Google searches a key criteria for this search service is:

How many sites offer links to www.merrifield.com?

So, if you have been getting any economic value from these DCCís AND you have a web site with a links section, could we implore you to add www.merrifield.com to the section and then send us an email telling us where to go to check it out?

If you want to add some promotional comments to the link, because that might be the style for you link section, then we trust you. Or, you might write something to this effect: " a great site for lots of free, substantive, management advice on how to run mature service businesses better."

If you think your site is just brochure ware, donít worry. We have no pride. Any link references would be much appreciated!

Thatís all for this week!

Bruce Merrifield