December 17, 2003: Distribution Channel Commentary (DCC) # 51

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THIS WEEK’S TOPICS

  1. Info Models Behind: College Football Bowls; the Shuttle Crash; & Our Company
  2. Big Gains in ’04 Must Start with Big Mindset Shifts
  3. New Distribution Book on Customer Profitability; Increase Order Size Before GM% (?)
  4. Another New Book Concludes that Changing Sales Force Incentive Plans Doesn’t Matter
  5. How Can You Help All Employees "get on board" and "get the numbers"?
  6. Manage Health Care Costs with "Health Reimbursement Accounts"
  7. Politically-Incorrect, Marketing-Research, Scientific Breakthrough Study J
  8. DCC #52 Will be Posted Next Year 1-07-04; Happy Holidays
  1. Info Models For: College Football Bowls; the Shuttle Crash; & Our Company

Do you have any intellectual curiosity about how the college football teams got selected to go to which bowl game after Oklahoma’s last game drubbing still left them at #1? If so, you will enjoy reading a fascinating article/interview with the author of the computer ranking model that made the decisions. The Bowl Championship Series committee (BCS) chose Wes Colley to create the mathematical matrix that determines the final team rankings.

What does Mr. Colley think? His matrix had the following final rankings: 1) OK; 2) LSU; 3) S. Cal. But, Colley would personally over-ride his computer model and choose: 1) LSU; 2) S. Cal; and 3) OK. He points out in the article that the model is weighted toward which team’s total season record deserves to go to which bowl, not the team most likely to win in January. He points out that all pro league tournament seedings have no "chronology" factor in their seeding system. And, a single-game elimination tournament can often be won by a lower seed that has great luck, combined with a better team’s poor luck. (Villanova beating heavily favored Georgetown in the 1985 NCAA basketball tournament final with a .786 field goal percentage comes to mind.)

However, distributors using simple customer profitability ranking reports don’t have to worry about which customer is truly #1. All of the top 5% are screamingly profitable no matter what activity based assumptions you use. And the bottom 3% that destroy as much as 30% of a distributor’s total real profits are total losers that can be turned into winners 80% of the time no matter what scoring model is used. So, by coming up with new programs for both customer segments, big upside profit improvements can happen.

For the curious, here’s the link to Mr. Colley’s fascinating story: http://www.bayarea.com/mld/mercurynews/sports/7467055.htm.

Moving on to NASA’s post-mortem on last summer’s space shuttle crash, besides the foam insulation peeling off the wing upon atmosphere re-entry, a big cause of the crash was TOO MANY POWER POINT SLIDE SHOWS! How can power point slideware make you dumb?

Edward Tufte, the most famous theorist on information presentation, points out the following in a 28 page pamphlet:

  • The average slide has only 40 words, eight seconds of reading and "faux analytical" bullets.
  • PowerPoint shows are infused with an "attitude of commercialism that turns everything into a sales pitch." In particular, "the popular PowerPoint templates (ready-made designs) usually weaken verbal and spatial reasoning, and almost always corrupt statistical analysis".
  • A chart in the Wall Street Journal averages 120 elements whereas a PowerPoint slide has only 12, so slideshow viewers don’t get a comprehensive understanding of data groupings.

How does this all relate to distributors? The financial management reports that most distributors use for running their business are superficial, unbalanced and misguiding as far as:

  • Creating distinctive value for a target customer niche at a time.
  • Creating sustainable, superior profitability for their company.
  • Attracting, keeping and inducing extra effort from the best: employees, suppliers, capital providers and customers.

If you think "financial management" does anything more than slowing down how fast a company is dying or going broke in a changing world, you might want to check out the following links:

A short "PowerPoint Makes You Dumb" article: http://www.nytimes.com/2003/12/14/magazine/14POWER.html.

For a comprehensive read on the problems with "financial management" thinking and practices for distributors, check out "Chapter Two" under the red star on our home page at http://www.merrifield.com.

    2.     Big Gains in ’04 Must Start with Big Mindset Shifts

The borrow-and-consume, sugar-high, US economy is now in high gear. Two questions about it:

  • Do you think it can last long enough to get Dubya re-elected?
  • Is your firm getting its fair share? Are your profits and pre-tax return on total assets improving equal to or greater than the reported growth rates in the GDP (and the future liabilities that we are putting on our children and grandchildren)?
  • If you are not seeing sufficient profit power improvement, consider this line of thought:

  • Big gains must come from big change, not fine-tuning around the edges of our business model.
  • Big change must be preceded by a big change in management’s collective mindset.
  • Sometimes simple, but powerful new perspectives on our world can start mind shifts.
  • Big mindset change has two components: intellectual comprehension and emotional acceptance. The latter is harder to achieve and takes a lot of repetitious "dialogue" before a critical mass of team members will be eager to forge ahead with a new blueprint.
  • Here is an historical example and a cute experiment to add some energy to the points above:

  • The Greeks first hypothecated that the world was round and calculated its circumference to within 1% accuracy around 250 BC. But, Columbus was the first to go west to get to the east setting off a 50-year European exploratory stampede to discover and start colonizing the world.
  • In the following phrase use colon(s) and/or comma(s) to make radically different statements.
  • A woman without her man is nothing

    Try these two:

    A woman, without her man, is nothing.

    A woman: without her, man is nothing.

    Here are a few suppositions to challenge current mindsets:

    What if:

        1. 20% of our customers generate 80% of our sales (modification of Pareto’s Law).
        2. 30% of our customers generate 70% of our margin dollars.
        3. On a ranking report by customer profitability, the top 20% of our customers generate 150% of our operating profit.
        4. On average, we could sell 30% more to the top 20% of our customers ("more to the core in ’04). 90% of this incremental volume would be on existing, best-bought and turning items that would build average order size, so that 50% of the incremental margin dollars would flow-through to the profit line.
        5. The bottom 3% on the customer profitability ranking report are costing us 30% of our total profit. But, 80% of those customers could be persuaded to change their ordering patterns to dramatically improve average order size and become profitable.
        6. 5% of the customers in any mature industry segment that we sell into will generate 80% of the new profit growth for some would be supplier over the next 5 years.

    Could any of these suppositions apply to your business? How do you know? Even if your management team could only agree that half of these suppositions were half true, what could you do differently in 2004 to achieve significant improvements in your business?

    If any of these comments have been provocative enough for you to dig further, we can recommend:

    • A ton of free follow up information at www.merrifield.com.
    • Telephone consulting with a value/minute that is off the charts.
    • And, there are only 7 more shopping days to Christmas for you to buy our video, "High Performance Distribution Ideas for All". It happens to be a total transformational, university in a box for eventually all of your employees. There are links to over 40 pages of information, testimonials, etc in the center column of our home page. For a ridiculously small investment, you can give your company a mind-shifting-for-big-gain-catalyst present for 2004.
     3.   New Distribution Book on Customer Profitability; Increase Order Size Before GM%(?)

    I have recently skimmed through the manuscript of Brent Grover’s new book, "The Road to the Top Quartile; Customer Profitability Tools for Distributors". It will soon be published by NAW/DREF (www.nawpubs.org), and I will re-mention it when it becomes available. It breaks new, well-researched and practiced ground for distributors. No other book to date has so totally and thoroughly looked at running a distribution business for the benefit of all of its stakeholders on the basis of customer profitability.

    Brent is the real deal. We first met in the mid-‘70’s when we were helping to launch the paper distribution channel’s "Young Executive Forum" for the National Paper Trade Association. Brent subsequently applied customer profitability tools and thinking to his family business to turn it into a high profit, high growth machine.

    While we are waiting for the book to be published, here are some customer profitability patterns to consider:

    • There is no correlation between the profitability of a customer and the customer’s average gross margin percent. Higher margins on much smaller orders don’t have enough margin dollars to cover the cost per transaction.
    • While all most-profitable customers have a big annual volume in sales, not all big volume customers are profitable.
    • There is a high correlation between customer profitability and the average margin dollars per transaction for a customer.
    • In case studies that I have been involved with, the top 10 most profitable customers routinely have lower average margin percentages that are 10 to 20% lower than the average company margin percent, but the order size is 2 to 4 times larger than the company average.

    So, what’s easier for a bigger account? Trying to raise or quote a higher price/margin percent; or, to ask how you can work together to create a replenishment system that generates average order sizes that are significantly larger to cut down on both parties transactional costs?

    What’s easier with small accounts? Trying to raise prices on commodity items enough to cover transaction costs ; or, to install a minimum order size scheme that charges a flat service and/or delivery charge on orders below a certain profitable size. Because an extra charge on a small order is the equivalent of paying a big price increase on the entire order, customers will usually accumulate needs or order extra, future-need goods to make the minimum.

    Are your sales personnel educated and motivated to call on only those customers from which they can eventually generate a stream of profitable-sized orders? If not, would you be surprised if you are paying commissions on a lot of small order customers that you lose money on? Is this in the long-term interest of either your best sales reps or the company? For more on these issues, check out this article and the case study that goes with it: 2_19.asp.

       4.   Another New Book Concludes that Changing Sales Force Incentive Plans Doesn’t Matter

    Mike Marks and Mike Emerson have authored a new book published by NAW/DREF, which you can order right now, entitled: "What’s Your Plan? Smart Salesforce Compensation in Wholesale Distribution". The authors surveyed 584 distributors to see what the correlation between compensation scheme changes and market share gains or losses. They concluded that: "there is no relationship between a company’s sales incentive plan structure and its gain or loss in market share".

    In the very few outperforming companies, "leadership and management clearly outweigh the structures used to compensate….share gainers (also) have effective sales management processes".

    The books conclusions fit neatly with my kinetic chain for profit power, which was mentioned in last week’s DCC with a connection to the late, great Warren Spahn’s kinetic chain. For those of you who have not yet discovered this simple, powerful and comprehensive tool (It puts "incentives" in the 7th and last, but interwoven step of the kinetic chain: just like the wrist snap for pitching, golf club swinging and tennis serving.) here are the references for a lot more free and current information: article 2.1,; "High Performance" video module 5.10; or, this annotated slide exhibit link: ./exhibits/Kinetic_ChainEx_16.pdf.

    If you have the leadership curiosity and will, then Brent’s book will provide you with new strategic insights that will help you to reshape your systems, people, education, and finally, your incentives. Mike and Mike’s book will provide you with new insights for specifically reshaping steps 3 through 7 of my kinetic chain as it applies to your field salesforce. Here’s the link to more on the Mike and Mike book which is right at the top of this page: http://www.nawpubs.org/ .

        5.     How Can You Help All Employees "get on board" and "get the numbers"?

    Because distribution is an operational, service excellence and flexibility game, sustainable profit power and best customer retention and penetration can’t happen unless the bottom 80% of the payroll wants to make it happen everyday. But, what would any employee, chosen at random in your business, answer to these questions:

    • Who are the 5 most profitable customers in your company’s #1 targeted customer niche?
    • How would you describe that niche?
    • What are the service metrics that you measure everyday (and where are they posted) to insure that you are delivering the best total service value to that niche?
    • What can you do directly or indirectly to insure that those service metrics are hit regardless of the highs and lows of incoming shipments and orders?
    • Why should you care about any of this? What’s in it for you? How does high value-added, productivity per employee affect your chances of earning premium wages for the job niche that you are in for this metro area?

    Maybe a less ambitious test would be to see how much overlap there is amongst the answers to these questions from the top three or four highest paid employees. If we want all employee efforts to be focused like a reinforcing laser beam that can burn through steel, we can pursue better strategic alignment by figuring out the answers to these questions and teaching them to everyone. Our "High Performance…" video can help you do it all, but according to some users it is not the total answer. Here are two case studies to consider;

    CASE ONE: Top Performing Building Supply Distributor Discovers Socialist Hourly Worker Mindset

    This $100 MM in sales company ran their management team through the video process, and then moved on to the rank and file. At first, the hourly employees were:

    • Flattered to be let in on the numbers.
    • Surprised that profits were a fraction of what they had imagined and that they had to be substantially reinvested in the company to finance growth.
    • Totally confused when asked to re-explain.

    Over time, some of the employees started to reframe the profits as still very big numbers in comparison to what they got paid and started showing some passive resistance. This resistance was comprised of some persistent, intellectual misunderstanding that turned out to be more emotionally driven. By revisiting the concepts in section two of the video with other managers helping in the re-teaching, the employees finally all got that:

    • The "big" profit after tax" number wasn’t so big in proportion to the total assets in the business that had to grow by 7 to 10% to finance all employees’ collective financial expectations.
    • Their total compensation was directly affected by the labor wage range for their job niche in that city job market AND their ability to be part of a high gross margin dollar/employee, work-smart solution. High productivity would support premium pay for their job niche.

    The emotional part was that a good percent of the hourly employees didn’t really want to work differently or have to be individually and measurably responsible for service quality and quantity numbers. This company had been a strategically smart, but paternalistic firm for a long time. They had evolved to having an older, steady, good, because of low turnover workforce, that really wanted management to just keep taking care of them. The veterans couldn’t say this, so they kept looking for intellectual, nitpicking stalls on the number front hoping that the whole let’s-take-it-to-the-next-level program would just go away.

    Management persisted, however. Once they defined the real problem, they patiently kept answering the same (stall) questions in different ways and kept putting the service quality and quantity numbers up on the wall for all to see. One by one the resistors got with the new program, quit or were very patiently with excessive due process fairness "out placed".

    Isn’t this company glad that they didn’t have the auto, steel or airline unions in their shop? Because if they did, their future profitability would be at the mercy of the unions and federal protection and subsidies.

    CASE TWO: Branch Managers Get Extra Financially Fluency Training

    A Jan-San distribution chain had run all of their branch managers through our video. The managers were pumped to pursue the 7 customer profitability plays and the achieving perfect service modules, but some were honestly reluctant to teach the numbers stuff to their branch employees. The managers just didn’t feel financially fluent enough to both teach and emote the high performance numbers story.

    This firm choose to augment the video’s financial training with a game simulation service from Kelly Lyons called "Profit Adventure". The program comes in two formats: a facilitated session and an on-line format. You can find out more about Kelly’s story at: http://www.klyons.com/

    Kelly’s program was the solution. After simulating distribution financial scenarios for four hours, the management team was ready to go for it.

    The moral of these two stories is that big change will meet more emotional resistance than it will intellectual, but the resistors will try to make it appear that it is the reverse. In selling we know that when a buyer has emotional resistance to doing business with us, they will offer up "stalls". We can and should try to patiently address the stall instead of naming it as such and asking what the emotional hang up really is. This will just inflame the buyers' denial routines. We must, instead, address the stall patiently and not press for an answer at that moment. We need to give the buyer time to emotionally comfort zone a new proposed changed and/or relationship. In future sessions we might gingerly address possible emotional concerns that "other people might have" (not them, because it will hit their denial/anger button)

    Emotional change takes time and often never happens. With customers, if we have a truly superior economic solution, we may eventually: try to go around them; find a new account; or wait for them to turnover. With employees, they might change, leave, or be outsourced to some other firm’s payroll. In some rare cases, we might do a work around for a veteran manager or sales rep if all other affected parties can buy into it and tolerate it.

        6.     Manage Health Care Costs with "Health Reimbursement Accounts"(HRA)

    Because managing health care costs is a top concern of all distribution businesses, I thought a recent article in Inc magazine might be helpful. In the January 2004 issue, on page 40, there is a one page article on the why’s and how’s of HRAs. The magazine’s site does not yet seem to be offering it online. But, if you google the subject in quotes, you will get plenty of links. Here are a few, short, good links on the topic: http://www.cfo.com/printarticle/0,5317,8031|BS,00.html?f=options http://www.spokanejournal.com/spokane_id=article&sub=1781 http://www.nysscpa.org/trustedprof/1003/tp14.htm

        7.     Politically-Incorrect, Marketing-Research, Scientific Breakthrough Study

    "Science has finally proven what most men have known since puberty: they cannot think rationally with beautiful women on their minds". For the rest of the story on this breakthrough story, here’s the link:http://canada.com/search/story.aspx?id=d194fc77-9e01-45fe-a2cb-688a1935afd1.

        8.    DCC #52 Will be Posted Next Year 1-07-04; Happy Holidays

    We won't be publishing a DCC again until Wednesday, January 7th. I will be here in my office during that time trying to get some serious work done on my book, which I hope to have in print by May '04(?). If anyone out there has questions, issues, answers or wisdom, please don’t hesitate to contact me at bruce@merrifield.com or our office # 919-933-7474.

    Hope everyone has a relaxing, enjoyable and safe Holiday season! Here’s to a great 2004! Cheers,

    Bruce

    Bruce@merrifield.com

    www.merrifield.com