November 19, 2003: Distribution Channel Commentary (DCC) # 48

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THIS WEEKíS TOPICS

  1. A "MAGIC MATRIX", STRATEGIC-ALIGNMENT, WALL CHART
  2. SUPPLY-CHAIN, PRIVATE-LABEL COMMODITIES KILL MARKUP MODELS
  3. HOW TO PICK AN INTRAPRENEURIAL CHAMPION FOR A BIG CHANGE EFFORT
  4. BIGGEST, BEST WHOLESALER NEWS: FERGUSON ENTERPRISES, INGRAM MICRO
  5. DUMB FOODSERVICE DISTRIBUTION CHANNEL STRATEGY Ė CASE STUDY
  6. NO COMMENTARY NEXT WEEK, HAVE A HAPPY THANKSGIVING!
       1.    A "MAGIC MATRIX", STRATEGIC ALIGNMENT CHART FOR YOUR WALL

    I recently came across an article that describe the whyís and howís of making a "magic matrix" of a companyís best products sold to its best customers. This is a recurring theme in this commentary series. Sometimes color-coded, visual charts on the wall can help abstract ideas become a bit more concrete.

    The article is posted at the Harvard Business School "working knowledge" site. This site use to be a subscription type of place, but because too many other sites are giving away ever more "intellectual property", HBS has met the ante and raised it some. The home page for the site is at: http://hbswk.hbs.edu. The magic matrix article is under the "alumni insights" column. The link to the specific article: http://hbswk.hbs.edu/item.jhtml?id=3760&t=dispatch. This article will help all of your buyers and sellers to get on the right planet for improving profit power, but if you want to own the right customer niche ball park with the best possible win-win, replenishment relationships, you should check out these more in-depth, how-to, distribution-specific references which are now available in a summary document:

    "Chapter One" of our forthcoming book at www.merrifield.com (under the red star on the home page) explains why and how to sell best items to "most profitable" customers all in a common customer niche (not necessarily the biggest sales volume ones). Note especially the case of "ABC Distribution Company" that starts on page 21.

    "Chapter Two" explains why 50% of the incremental profit from more old to old selling that boosts average order size flows through to the "profit before interest and tax" (PBIT) line.

    Seven past commentary topics that deal with the specific how-toís for "Selling More to Our Core in "04" are summarized in DCC #44.2, and article # 2.20 on our web site explains a one-page, branch level report that is a potentially far more powerful tool than the magic matrix.

    If you are interested in this stuff, but donít have the time to go find it, request the total, 21-page, word document compilation from us via email. Just request "More to Our Core in Ď04" from karen@merrifield.com, and we will send it. This includes: a table of contents; 5 pages of excerpts from Chapter One; 2 pages from Chapter Two; a latest article; and the how-to DCC topics on the entire old to old process.

       2.    SUPPLY-CHAIN, PRIVATE-LABEL COMMODITIES KILL MARKUP MODELS

    If you want to know where your "product profitability" has gone, check out this new exhibit at www.merrifield.com. Under the "exhibits" button, check out #14 entitled "Profitability of Products (?)" to find out why:

    • There is no inherent profit power in 90% of the product volume sales for a typical distributor
    • Why and how "supply-chain commodity products" are driving margins lower
    • Why most consolidating distribution channels can no longer afford to push, new, incremental, even-exclusive, products/lines anymore.
    • The big question is: how can manufacturers re-deploy their marketing mix dollars into web-based, virtual trade-show site(s) that get the product story to niche end-users Ė faster, better, cheaper Ė while still re-intermediating and giving incentives to distributors and their sales reps? The distributors and their sales force have to have incentives to: get customers turned onto the site; to generate the earned leads; to do the follow-up close; and then take care of repeat orders in their on-going, lowest-total-procurement-cost, fulfillment way.

    As a separate exercise, I strongly encourage everyone to check out the Fast Company article link below. The recently posted article is entitled: "The Wal-Mart You Donít Know". As a student of Wal-Mart for the past 20 years, I was impressed with the new research and information in this in-depth article.

    First, here are some highlights:

    A 12- pound, gallon-sized jar of whole pickles from Vlasic, the #1 recognized brand, for $2.97. A yearís supply for the average American family; a statement item for Wal-Mart; what did it do for Vlasicís business model and total sales mix through all retailers? Itís in the article along with other supplier case studies that will blow you away.

    Wal-Mart has a clear policy: "On basic products that donít change, the price Wal-Mart will pay, and will charge shoppers, must drop every year." If you donít, they will go to your biggest competitor, they will consider private labeling and sourcing it from China.

    Wal-Mart can provide instant national distribution for no-name foreign manufacturers. An economist is quoted as saying: "One way to think of Wal-Mart is as a vast pipeline that gives non-U.S. companies direct access to the American market. One of the things that limits or slows the growth of imports is the cost of establishing connections and networks. Wal-Mart is so big and so centralized that it can all at once hook Chinese and other suppliers into its digital system. So wham!--you have a large switch to overseas sourcing in a period quicker than under the old rules of retailing."

    Donít you think every other category killer store and even the largest national distributors or buying co-ops can identify their most basic, non-changing, biggest volume items and do the same as Wal-Mart? Even $10 million distributors, who are #1 in their niche can source their own knock-offs from China as described in DCC#47.4. 47commentary.asp.

    If the items that generated the most margin volume are deflating, how can distributors cross-subsidize the launching of new niche products? When distributors think of the total marketing costs that were sunk into the dead items that are still collecting dust in their warehouses, they should realize it is time for a new marketing model for niche products.

    If manufacturers donít outsource the manufacturing of their biggest volume items to China, then their biggest customers will. One way to avoid benchmarking and producing items for less is to continually improve them, but then how can a manufacturer get the new part of the story through the channel to the end-user quicker, better and cheaper, especially if the channel canít afford to stock and push new products? Many channels need new, web-based methods for doing this. If anyone out there wants to discuss how to set up a distribution channel e-utility company to get niche products to end-users in a revolutionary way, please feel free to contact me.

    Enough, here is the link to a very profound and compelling article:http://www.fastcompany.com/magazine/77/walmart.html.

         3.    HOW TO PICK AN INTRAPRENEURIAL CHAMPION FOR A BIG CHANGE EFFORT

      A quick review of the index for all DCC topics (which is available under the "all past commentaries" in the upper right hand corner of our home page) turned up 17 topics that dealt with the topic of how to change old ways to new ways. The big underlying theme is that even with best strategic insights, most companies canít/wonít change until they are at deathís door. Then, many will just die during the end-game of a mature industryís consolidation, especially if there is a new-way innovator eating traditionalists alive. (The striking union grocery workers in the face of new Wal-Mart SuperCenters opening comes to mind.)

      One of the many problems companies face when they decide to make a bigger transition from an old way to a new way is: "Who will be the program champion?" Most can-do talent in mature industries gets promoted or becomes visible, because they have been good at fine-tuning the past without having to question the underlying assumptions for what works in the industry and the company. These people havenít had any experience in trying new stuff that never works the way you think it initially might.

      A good read on this problem and what to look for in a personís past experiences that would suggest that they could be a change manager is the article entitled: "How To Pick Managers for Disruptive Growth". This is actually a well-edited excerpt from the recently published book, "The Innovatorís Solution" which is Clayton Christensenís sequel to his first best seller, "The Innovatorís Dilemna". Hereís the link: http://hbsworkingknowledge.hbs.edu/item.jhtml?id=3712&t=innovation.

      Hereís an extra thought. Would anyone out there like an edited, compilation of all of the "how to change" topics that have been covered in the DCC series like the "More to Our Core in Ď04" e-document offered in topic one above?

         4.    BIGGEST, BEST WHOLESALER NEWS: FERGUSON ENTERPRISES, INGRAM MICRO

      My article scanning recently turned up two articles on two (of the very few) successful distribution channel consolidators: Ferguson Enterprises (primarily in plumbing supply) and Ingram Micro (PCs and related IT hardware).

      First, a short article summarizing a speech Claude "Chip" Hornsbyís, CEO of Ferguson, gave at the Pamplin College of Business (Virginia Tech). You have to read a bit between the lines to understand how Ferguson has both maintained and spread the best elements of a corporate culture that Dave Peebles created in the original Ferguson chain back in the Ď70ís and early Ď80ís before selling to Woolsley of the UK.

      Dave would pay more to get better quality people to expect a lot more. He had a very open-book, bottom line oriented, strong incentive culture. He invested continuously in on-going education. He hired people who could fit into where he was growing so that he could promote aggressively from within. Chip Hornsby is a product of this culture and sounds like a good on-going steward for it.

      A best, general indicator for the operational excellence of a distribution chain is their ability to find, develop and keep great branch managers at mature locations for a long time. Ferguson does this by continuing to be the one of the largest recruiters at Virginia Tech. In 1980 they recruited one Claude Hornsby from VT and put him in the pipeline. Hereís the link: http://www.collegiatetimes.com/index.php?ID=2627.

      The second article is simply a 3rd quarter financial results report by Ingram Micro, one of the big two, along with Tech Data, that have organically consolidated the long-time explosively growing info tech products channel. IM reported $5.2B in sales for the third quarter with a normalized operating profit of $14.5MM (.27% of sales) versus sales of $5.6B and a loss of $8.2MM in the third quarter of last year.

      A few questions:

      • Where are the economies of scale that most big distribution chains aspire to achieve? Answer: in most channels they donít exist, or if they do, the diseconomies of local service management capability are a bigger offset.
      • If small business is leading the way in new tech spending in the third quarter, why arenít both Ingram Micro and Tech Data seeing it? Could it be that the tax sweeteners passed by Congress this past Spring to spur small-firm spending, especially for PCs and "vehicles over 6000 pounds" (domestically made SUVs) didnít spur true corporate capital expenditures? Could the "corporate" SUVís and laptops be more for personal and back-to-school use, which would just cannibalize future consumer purchases? I think the jury is still out on whether there is enough pent-up demand to provide a sustainable domestic recovery. What we just experienced was a sugar high third quarter growth spike.

      Skim through this quarterly report from Ingram Micro and decide how much small business America is really spending on IT stuff: http://www.ingrammicro.com/corporate/display/main/0,1063,13691,00.html.

           5.    A DUMB FOODSERVICE DISTRIBUTION CHANNEL STRATEGY Ė CASE STUDY

        I recently received an email from Jonathan Bloom (more on him below) with a link to a McKinsey Quarterly article on why European retailers should strongly consider diversifying into the eat-away-from-home, foodservice distribution channel. As a highly experienced distribution executive and consultant, Jon was "mystified" by the articleís logic. I concur, it's just stupid. But the article has a lot of great industry data that Iím sure all of my foodservice distribution channel readers might enjoy skimming through.

        The simplicity and naivete of the articleís logic is the same kind of thinking that has lead many manufacturers to either forward integrate into distribution channels or sell direct to end-users. The direct sellers get instant incremental sales and margin contribution dollars, but they usually do not, at first, measure their total sales and service costs which grow much faster than the margin dollars. For readers who are with manufacturers that are guilty of selling too many customers direct, you might want to check out:

        • DCC #19.4 "Why Manufacturers always fail at forward integration into distribution channels" 19commentary.asp.
        • And review "iron butterfly economics", the second strategy map, in Chapter One of our forthcoming book. http://www.merrifield.com/.

        The elevator speech lines to remember are:

        • You can by-pass a distributor but you cannot bypass the cost of distribution. Are both the manufacturer and the end-user the low-cost operators at doing the distribution function? If (probably) not, then the function should be outsourced to the best specialist(s) that are out there.
        • Distribution channel ecosystems are far more complex and dynamically flexible and changing than first meets the eye. Beware of advice coming from young suits who have never worked in distribution channels. The big consulting firms do produce some great stuff, but nobody bats 1000.

        The link to the McKinsey article is below, and as you skim through it realize the comedy in its publication timing. As this article was being posted, a great case study on a European retailer diversifying into foodservice distribution is being played out. Ahold, the worldís third largest supermarket group based in the Netherlands, paid ridiculous prices for the companies that were rolled up into US Foodservice that is now doing a slow-motion implosion due to accounting fraud. The parent company is now in a fight for its life. Volume is vanity, profit is sanity.

        Hereís the link; you may have to do the free registration thing: http://www.mckinseyquarterly.com/article_page.asp?ar=1257&L2=20&L3=75.

        P.S. Whoís Jon Bloom? You should want to meet him if you have a privately held, family business for which you are trying to figure out how to continue to grow profitably AND manage the family succession process. Jon and I have been friends since we first met back in the mid-Ď70ís when we were both in the wholesale printing and industrial paper distribution industry. Since then, heís done it all and has my highest regard and recommendation. Heís based out of Summit. NJ, and if you think you have an incipient, King Lear succession problem within the family kingdom, you might drop him a line at jobloom@darkforestassociates.com or call him at 908 522 3140.

             6.    NO COMMENTARY NEXT WEEK, HAVE A HAPPY THANKSGIVING!

          Next week I will be happily engaged in all kinds of family and Thanksgiving activities while reflecting on our many blessings. I wonít have time to do a commentary, and hopefully all of you will be happily preoccupied with no time to read one. Iíll be back with #49 on December 3rdrd.

          Happy Holiday to all,

          Bruce Merrifield

          Bruce@merrifield.com

          919-933-7474