January 21, 2004: Distribution Channel Commentary (DCC) # 54

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THIS WEEK’S TOPICS

  1. Getting Paid For Your Service Value
  2. First-Mover On China Knock-Off Goods Update
  3. New Year’s Educational Enlightenment Options
  4. Future Of Computing? Roll Your Own "Web Services"
1.    GETTING PAID FOR YOUR SERVICE VALUE

A high performing, distribution client asked me with frustration last week: "How will we ever get our customers to understand and pay for the "total procurement cost" (TPC) value of our outstanding service? Many of them just can’t seem to get their heads past buying on price."

Before we feel to sorry for this chap, you should know that they have been growing 2 to 5 times faster than their channel competitors and have an average ROI for investors that is north of 20%. But, his dedication to selling his value proposition until every customer admits to his service value truth is one of the reasons that his company does so well.

From my weekly scanning of business news, our friend is not the only person with the problem of getting paid for superior quality. Here are a few illustrations:

In the two-page article entitled - "Flexing Your Pricing Muscles"- in the February issue of Inc. magazine reported that wholesalers lagged all business sectors except retailers in their ability to raise prices. In a November survey, 17% of wholesalers raised prices, while 17% lowered prices. The link is not yet available. You can check out pages 25-26 at the news stand or wait a few weeks for them to post it at www.inc.com.

Moving on to cars. USA Today reported that by contrasting the JD Power Quality scores for cars versus another survey on relative pricing, there are huge over-pay and under-pay differences between brands. Generally, we have been paying too much for European cars and too little for American brands (and Lexus!) The brands that were the most over-priced: Land Rovers (75.3%), Kias (66.6%), Volkswagens (58.3%), Volvos (36%), Mercedes (34%), etc. One that was under priced: Mercury (42.3%). To see how could or bad a car value shopper you are, you might want to check out this link: http://www.usatoday.com/money/autos/2004-01-15-quality_x.htm.

For those who don’t want to or can’t access the article right away. Here are a few key points:

  • Perceived quality may be a bigger driver of sales than (actual) quality. (Don’t assume that customers will recognize best quality service, advertise in clever, focused and persistent ways.)
  • A quality reputation takes three times longer to get than to lose. (Be patient and don’t suffer key service employee turnover before, during, or after achieving distinctive service levels. When your service becomes distinctive, don’t relax. Once your customers have been educated to appreciate better service, backsliding is noticed and punished quickly.)
  • "The over-appreciated brands face a potential minefield." (This article won’t help!)

For those of you who want - the real beef; the distribution-specific, how-to, free stuff - here are a series of articles that are posted on the website that you might want to skim through:

  • #3.8 Selling and Getting Paid for Service Excellence. 3_8.asp.
  • For how to define "service excellence" check out: #3.1 How to Define Service Excellence 3_1.asp.
  • For more on both defining service and relating to the lowest total procurement cost see exhibits #2 "Four Guidelines for Great Service Encounters." ./exhibits/4guidelinesforservice.asp and #3 "Eight Elements of Service Excellence." ./exhibits/8elements.pdf.
  • For more on how to make invisible service value elements visible in the marketing process for distinctive service see: article #3.2 "A Service Goal – the Unconditional Guarantee", 3_2.asp and article # 3.4 (for manufacturers) "Selling Perfect Service through a Channel." 3_4.asp.
  • Assuming you can define a "perfect service" set of metrics for one customer niche at a time, how do you achieve it? See the overview article #3.9 "TQM Resuscitation Tactics" 3_9.asp. If you want the entire "how to" story in an educational format to share with everyone, then buy our "High Performance Distribution Ideas for All" video for which there is over 40 pages of information behind links in the middle of our homepage at www.merrifield.com.
  • For annotated slide shows on the whole get paid for service topic that you could share with your employees, see two posted shows: #3 – "A Distributor’s Total, Unique, Product/Service Value Proposition" Dist_Value_proposition.pdf, and #6 – "Fees for Services?" Fees_for_Services_slides.pdf. If you want copies of the PowerPoint slides used in any slides shows emailed to you, request them from karen@merrifield.com.

But, the biggest opportunity for making a lot more money is not in raising prices, but to get the 50 to 80% of your customers that have average order size margin dollars below your average order transactional costs to boost order size. This can be done through a variety of methods that are covered in our video modules #ed 3.5 to 3.11. Check out the overview descriptions for these modules at this link: ./video/summary_notes.doc.

Other, order-building, how-to references are articles 2.15 2_15.asp, 2.3 2_3.asp, and 2.19 2_19.asp. There are also a number of past commentary topics that address this opportunity, the most recent being 51.3. 51commentary.asp.

2.    FIRST-MOVER ON CHINA KNOCK-OFF GOODS UPDATE

Regular readers know that I have been following many angles of the rapid migration of our manufacturing base to China. I started in the very first commentary (DCC #1, topic #2). Who will be the winners and losers as more deflationary knock-offs from China permeate your channel? If you would like to skim through all of my observations on this topic, here are the past DCC topic #s: 1.2, 17.1, 24.3, 30.2, 46.6, 47.4, 48.2, 49.2 and 52.4.

Here is one more, latest, perspective on the outsourcing of production to China. This article focuses on China’s infrastructure investment bubble which may well cause a "growth accident" to happen, perhaps this year. But, I think that the big migration story will continue on in spite of some big bumps in the road. Here is a link to an excellent in-depth article from the New York Times entitled: "Is China the Next Bubble?" http://www.nytimes.com/2004/01/18/business/yourmoney/18china.html.

3.    NEW YEAR’S EDUCATIONAL ENLIGHTENMENT OPTIONS

I have a lot of problems with year-end evaluations and bonuses not matching up with the longer-term commitments that it takes to create sustainable profit power. When proactive efforts require expenses and investments in the current year with returns in later years, most people won’t do them because they will effect year-end results and bonuses. For a lot more on this issue see, "Chapter Two" of my "forthcoming book" that is posted on our homepage under the red start in the right hand column. (I now hope to have it in print by next September.)

But, because most companies will still continue to do the financial/calendar year-end thing, here are some thoughts for getting smarter in 2004. You could, first of all, ask the people around you for unvarnished, anonymous feedback on "how am I doing?" The big company business name for this process is "360 degree feedback". I happened to stumble across an on-line 360-degree service that has posted an interesting example of one of their summary reports. I encourage you to skim through it – great graphics! Here are both the service’s home page link and the sample report link:

Homepage: http://www.360onthenet.co.uk

Sample report: http://www.360onthenet.co.uk/360/pilat_ft/sample.pdf

P.S. There are a few interesting "white papers" that are also posted on this site.

My own preference for "360 degree feedback" is to keep it all quicker, easier and cheaper as part of doing anonymous employee surveys twice a year. My one page format is the same on the top part both times. It asks for: a 1 to 10 score for both now and 6 months prior, as well as for some written in factors that could boost them a point or two. On the bottom half of the page, once a year, I ask them to rate their leader on a 1 to 10 basis and write in the leader’s most notable strengths and weaknesses. How to do this and then follow up are covered in our "High Performance…" video module #s: 3.15, 5.5 and 5.6.

Good management feedback tools are helpful, but far from being sufficient at making us better managers. If we videotaped an athlete or speaker’s performance, their next performance is not apt to be that more effective. There are, of course, a lot of factors and work that go into being a more effective performer. For more on the factors that go into being a better leader/manager, check out our article #6.1 "Steps to Leadership Effectiveness". 6_1.asp.

In a similar fashion, surveying employee morale twice a year is critical, but not sufficient for helping them all improve continuously; we could have the wrong talent in the wrong job just for starters! To get an overview of other personnel "systems", check out our article #ed 5.7 "Personnel Systems for Hiring and Keeping the Best"5_7.asp . This article only touches on what is covered in great detail in six hours of audio tape from one of my live, day-long seminars in our $95 product, "Hiring, Training, Motivating and Keeping the Best Employees". Contact us anyway you would like to order it.

A second major way to learn how to be a manager is through our own big, dumb mistakes. The school of hard knocks is probably the most expensive, painful and common way to learn. If you would like to read a short, autobiographical article on Tim Boyle, the CEO of Columbia Sportswear who took his family business to the brink of bankruptcy before somehow steering it to the big time over the past 35 years, check out the link below. While you are reading this honest story, think about your succession plan and what you will be doing educationally this year for the managers who might be replacing you tomorrow if you are hit by a bus. Could they take the company to the brink and perhaps over? Here is the link: http://www.nytimes.com/2004/01/18/jobs/18boss.html?8br.

A third way to get distribution-specific, educational enlightenment is to consider four different speeds of curriculums that are currently being offered out there in the world of independent distribution channels.

For rising management trainees and junior managers, consider the "University of Industrial Distribution" one-week session with lots of courses and instructors to choose from each day. Although the program is supported by and promoted by about 20 distributor-to-industry trade associations, the course material will work for any distribution channel denizen, and the UID folks will gladly accept anyone’s application. The 10th annual university session will be March 7-10th in Indianapolis. For the total story go to this link: http://www.univid.org.

For more veteran managers looking for a more intense classroom, interaction amongst non-competing distributors and manufacturers, the Texas A&M (TAMU) School of Industrial Distribution has created through the "Read Center" a "Certificate of Distribution Management". I just taught for 1-½ days within this program and was very impressed with all aspects of it. For the total scoop on this program, here is the link: http://readcenter.tamu.edu (look under "seminars").

The highest-level, university program that is distribution specific that I have come across is TAMU’s "Masters in Industrial Distribution" program. This is an on-line program that attracts serious upper level managers from all over. I have just started to teach a course in this program entitled: "Re-inventing Distributor Profitability". I hope to be able to recycle some disguised case study wisdom from the course in my commentaries. Here is a link to the PDF brochure on the program: http://readcenter.tamu.edu/finalBrochure/midBrochure.pdf.

And, of course, the fastest, least expensive, most comprehensive total curriculum in a box for all employees is our "High Performance…" video, which is unconditionally guaranteed.

All of the suggestions above are not shameless-plug advertisements, but public service announcements.

And, here are two closing quotes from ancient Chinese sages:

By three methods may we learn wisdom. First, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest. (Confucius)

When the student is ready, the teacher will appear. (Lao-Tzu)

4.    FUTURE OF COMPUTING? ROLL YOUR OWN "WEB SERVICES"

When we move into new calendar years, a lot of publications do forecasting articles. Because chip power continues to increase about 30% a year for the same dollar, there is never any shortage of future hype in the world of info-tech (IT). The Financial Times and its sister publication, The Economist, both had in-depth articles on the "future of computing" in the past week (links? For subscribers only). A good summary of what happened in 12 different trend areas of IT in 2003 is posted for all at this link: http://www.line56.com/articles/default.asp?ArticleID=5264. (Warning: this article would not print out, I had to copy it and paste it into a word document to be able to read it later.)

While keeping abreast of these trends is one of my jobs, I find that the killer apps that are really making individual distributors serious money are homegrown solutions built on top of basic service brilliance to core niche customers. One client, for example, has 500+ employees, but four core executives – the CEO, COO, IT Manager and Purchasing Mgr. – have all personally gotten involved in trying to understand their core niche customers’ informational hassle needs. Then they created web-based communication tools to and from the customers AND to and from the key suppliers that could offer either the most important price deviations for big contract quotes on commodity items and/or the fastest response times for special order needs. This total supply chain service process solution gives the distributor’s target customers the following main service values:

  • Real time updates of what they have been buying versus what they and their contracts had forecasted that they would/should be buying. This allows them to get higher effective fill-rates on fewer, bigger, warehouse orders which also improves the distributor’s economics.
  • They can continually update their inaccurate and out of date central forecasts.
  • They receive lower everyday prices on commodity items and faster response/delivery times on special order needs.
  • There has been elimination of errors by all three parties – suppliers, distributor and customers – that saves everyone a lot of error curing cost.

What are the main, summary points for any distributor in any channel?

  • IT solutions that help you "run your business better" are typically oriented toward internal process efficiency, and are often not user-friendly with customer niche process needs coming into the company. One size fits all customer relationship management (CRM) packages aren’t, for example, doing the few, peculiar, vital right things for the few vital, right customers in your #1 niche. Often these "application platforms" become inflexible prisons.
  • Communicating between strategic customers and the suppliers that can best serve those customers can be done with "web services". But again, the one-size fits all solution doesn’t work, let alone give any one distributor a sustainable advantage.
  • The solutions that my client created above are not conceptually complicated in hindsight. Any competitor in their channel could knock them off easily, if they could see what they are doing. Hence the need for proprietary development by my client, and my disguised, vague case study description. Software vendor consulting services might help their customers with customer-niche specific tool development, but how can the vendor assure the distributor that they won’t sell the new solutions to all of the other distributors in the same channel that are also part of the vendor’s installed user base?
  • The most successful distributors will continue to identify, create and leverage outside-in information communication and coordination tools for one customer niche at a time. Their sales forces will continue to sell "total procurement cost" replenishment systems that are software supported. Feature, benefit product selling will be icing on top of securing the 90% of the volume comprised of commodity products that are lowest-TPC sensitive.

Here are a few closing thoughts on "THE GREATER TOOL THEORY" that IT "solution providers" keep hyping:

  • Software and hardware are step #6 in my "kinetic chain for sustainable profit power". If we are missing something from the first 5 steps, then the greater tool won’t deliver the promised benefits. (For one annotated slide on the kinetic chain go to: ./exhibits/Kinetic_ChainEx_16.pdf)
  • "Technology does not automatically improve conversation, communication or behavior." (Theodore Zeldin)

That’s all for this week!

Bruce Merrifield

www.merrifield.com

101 Black Oak Place

Chapel Hill, NC 27517

919/933-7474