February 18, 2004: Distribution Channel Commentary (DCC) # 58

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THIS WEEKíS TOPICS:

  1. QUOTES ON CHANGE, BECAUSE WE HAVE TO DO MORE OF IT BETTER.
  2. WHAT ARE THE (16) BIG QUESTIONS DISTRIBUTION CHANNEL EXECS ARE ASKING? WHAT ARE THE BEGINNINGS OF THE ANSWERS?
  3. EMERGING TECHNOLOGY- GREAT ARTICLE SOURCE, THIS ONE ON RFID.
  4. SPECIAL DIVIDENDS & CAPITAL GAIN EVENTS IN í04, WILL RATES RISE IN í05?
  5. BEST ECONOMIC READS FOR THE WEEK THAT YOU WONíT FIND IN THE NEWS.
  6. WHAT ARE YOUR EMPLOYEES LEARNING FROM "THE DONALDíS" NEW TV SHOW?

(NEXT WEEKíS THEME- HOW TO LISTEN TO THE CUSTOMER A LOT BETTER.)

  1. QUOTES ON CHANGE, BECAUSE WE HAVE TO DO MORE OF IT BETTER.

Here are some quotes on "change" that are arranged in a chronological sequence:

  1. "If past history was all there was to the game, the richest people would be librarians." Warren Buffet
  2. "Slumber not in the tents of your fathers. The world is advancing." Guiseppe Mazzini
  3. "Change yourself, change your fortunes." Portuguese Proverb
  4. "Being willing to change allows you to move from a point of view to a viewpoint Ė a higher, more expansive place, from which you can see both sides." Thomas Crum
    (For example, rank customers by profitability; think of the seven strategic programs that you can then do better. See slides 7 and 8 at this link:
    Identify_Customer_Niches.pdf)
  5. "The first step toward change is awareness. The second step is acceptance." Nathaniel Branden
  6. "Donít fear change ó embrace it." Anthony J. DíAngelo
  7. "Change happens in the boiler room of our emotions, so find out how to light the fires." J. Dewar
  8. "If one desires change, one must be that change before that change can take place" Gita Bellin
  9. "Thatís the risk you take if you change: that people youíve been involved with wonít like the new you. But other people who do will come along" Lisa Alther
  10. "When youíre finished changing, youíre finished." Benjamin Franklin

For more on how to turn the change process from a hit or miss art to a more consistent science see this annotated slide show on "closing the knowing-doing gap"; Knowing_Doing_Gap_slides.pdf.

    2.    WHAT ARE THE (16) BIG QUESTIONS DISTRIBUTION CHANNEL EXECS ARE ASKING? WHAT ARE THE BEGINNINGS FOR THE ANSWERS?

Iím currently teaching an on-line graduate school course in which the participants are working towards a Masters Degree in Industrial Distribution offered by Texas A&M. My course is conveniently entitled "Reinventing Distributor Profitability". I do have to expand the application of my ideas beyond the scope of independent distribution firms because we have students working for:

  • manufacturers that sell through independent distribution channels,
  • US Army logistics,
  • a natural gas distribution company (that starts by collecting it at the wellhead),
  • plus distribution firms in several different types of channels,

(For more information on the program, here is the link to their web site: http://mid.tamu.edu)

In my initial assignment, one of the things that I asked them to do was an optional task of sending in "the one or more biggest questions for which they would like more "enlightenment". I didnít guarantee them satisfaction, but I did promise to compile them, add some starter thoughts and references and encourage them to start discussion threads. Here is a link to a document on our site that summarizes 16 of their questions along with my starter thoughts. ./exhibits/Summary_of_the_Class.asp.

If anyone out there in reader land would like to send me your one big question or would like to add some thoughts to the ones that I have posted, please email them to me. I will try to address the questions or re-cycle your wisdom in either or both the DCCís and my on-line class with whatever attribution you might like. Many readers tend to be shy and want disguised credit, which is OK!

If you doní want to sign up yourself or one of your employees for a full-blown masters program, but still want a full day of total immersion in my "high performance" thinking and tactics, I will be teaching my stuff all day on March 10th in Indianapolis as part of the "University of Industrial Distribution" program. For more on that program, here is their web site link: http://www.univid.org.

I did not inquire with the UID staff as to whether you might able to attend my session for a reduced fee. But, if that is what you might like to subscribe to, you might inquire to see if you can cut a deal.

    3.    EMERGING TECHNOLOGY - GREAT ARTICLE SOURCE, THIS ONE ON RFID

One of the questions in the exercise above asked about the potential of RFID technology. You can read my starter thoughts to the question in the document linked above. But, I referred the class to an article posted on the web at this link: http://www.discover.com/issues/mar-04/departments/emerging-technology/

If you go there, you might click back to the home page of Discover magazine and check it out. Like most such sites, they give away some free content, which is excellent, as you will see in the RFID article.

    4.    SPECIAL DIVIDENDS & CAPITAL GAINS IN í04? WILL RATES REVERT IN í05?

The Bush tax cuts that lowered the maximum tax rate for both capital gains and dividends to 15% in 2003 from 38.6% in 2002 are not looking so permanent to a lot of smart people in 2004. The big concern seems to be that in 2005, regardless of who gets elected President, the government will have to raise taxes in order to deal with the out of control deficit spending and mounting debt and un-funded, future social service liabilities. Because the bottom 70%+ of the households by total income are precariously burdened with debt, taxes will have to be raised from where the money is and the votes arenít, which is: capital gains, dividends, estate taxes and top income brackets.

Hereís a link to an article that covers a special one-time dividend for just this year by Anixter, the wire and cable distributor, because of this tax forecasting logic. It also includes speculation that Microsoft may disgorge a big chunk of their cash horde, if and when their pending litigation problems are cleared up: http://money.cnn.com/services/tickerheadlines/for5/200402120032DOWJONESDJONLINE000021_FORTUNE5.htm.

To show you how Wall Street insiders are cashing out at low tax rates with the help of retail investors, consider this scam. Individuals poured $40B in fresh money into mutual funds in January. I suspect that most of this money was year-end, retirement account contributions, and a lot went into index funds that promised "high yields" from either bonds or Real Estate Investment Trusts (REITs). These funds then buy newly issued "junk" bonds from marginal companies that then use the proceeds to pay the inside shareholders big, one-time dividends. Who do you think will do better over the next few years; the insiders or the retail investors? Here is the link to the sad story that I read in the print edition of the Economist. You may not be able to access it if you are not a subscriber: http://www.economist.com/printedition/displayStory.cfm?Story_ID=2429044.

Wall Street sharks aside, the question for you is: what would be good financial stewardship for your companyís stakeholders over the next 10 years assuming that tax rates on dividends and capital gains were to revert to at least 2002 levels in the next few years?

    5.    BEST ECONOMIC READS FOR THE WEEK THAT YOU WONíT FIND IN THE NEWS

True supply-siders may scoff at the question at the end of topic 4 above, because they know that we are in a normal economic recovery. If you are getting your business news from:

  • the American press that is supported by big business advertisers;
  • Wall Street investment firm cheerleaders; and/or;
  • Federal government spokespeople including all of the Fed Reserve directors who seem to be cheerleading in record amounts since the New Year (they doth cheerlead to much me thinks),

then, you will not be hearing much about:

  • the growing debt level exhaustion that is sitting on top of our economy;
  • the flat and insufficient job and income growth shortfall due to record outsourcing that is hitting younger, more naïve and debt happy consumers;
  • or, the global imbalances caused by our triple deficits Ė Fed budget, trade balance and current account Ė that are being monetized by the central banks of the US, Japan and China.

Because these factors are huge and unprecedented, I track them in the Financial Times and its sister publication, the Economist. Within the global media community, these two publications, IMHO, offer the best, most-balanced coverage. But, I also troll around a number of independent research sites for more coverage on the economic weather. A best site that will link you to a broad array of analytical opinion is at this link: http://www.safehaven.com.

For this week, here are two interesting reads plus a factoid from the unvarnished, non-cheerleading side of the news. First, a good summary piece on the USís total interest bearing debt levels versus the income to service the debt. http://www.321gold.com/editorials/benson/benson021304.html.

To add to the information in the article above, here is an interesting factoid on "underwater auto loans"

November 25 - Dow Jones (Christine Richard): "Large cash-back payments and other incentives have been driving auto sales in the U.S. in recent years, but besides shifting cars out of the showrooms, these deals are also creating riskier auto loans. That's because incentives aren't just being used to discount the price of vehicles. Often, they provide a way to bail customers out of old auto loans, freeing them up to finance new purchases. 'Dealers are very creative,' said Bob Kurilko, vice president of marketing at Edmunds.com, which provides research and information on buying vehicles. 'They do what they have to do to get the deal done.' Sometimes that means giving a hand to buyers who owe more on their current auto loan than the auto's trade-in value - otherwise known as being 'underwater' on a loan. It's a surprisingly common problem. According to the latest data from Edmunds, during August, 29% of all trade-ins in the U.S. were underwater, with the average shortfall between the loan amount and the trade-in value standing at $3,700. That's up from August 2002, when 26% of trade-ins were underwater by an average of $3,280... In California, Texas and Alabama, 40% of all trade-ins were underwater in August. In California, the average shortfall on trade-ins was $4,700, said Kurilko."

Could there be both a generation gap and an information gap going on between executives over 50 and hourly wage earners under 40? There are some very, young, financially naïve and debt-crazy people in the US who have only worked during boom times (1982-2000 with our current sugar-high, recovery). Can these people afford a job loss, a divorce, a medical mishap or a rise in interest rates if and when the world decides to stop buying our dollar-denominated debt instruments? Do any of these folks work for you? Is the Donald giving them their business education through reality TV (see topic 6)?

For the second article, Katherine Welling, a long-time writer for the Wall Street Journal and Barronís, has now gone free-lance. Because no one in the US press was giving any air time to the "deflationists", she rounded up three of the most prominent Ė Gary Shilling, Bob Prechter and John Makin Ė and did a fascinating interview with them. They donít all agree on all things, and I donít agree with them on all things. But, the range of insights and the concerns they raise are worth using for tests against your personal planning scenarios. Hereís the link: http://www.weedenco.com/welling/lilogopv.asp.

    6.    WHAT ARE YOUR EMPLOYEES LEARNING FROM "THE DONALDíS" NEW TV SHOW?

Have you watched the new, reality TV show, "The Apprentice", starring Donald Trump? I havenít and donít plan to. I have already watched enough of the Donald live, up-close and personal at the finals of the US Open a few years ago. Whatís amazing to me is the credibility that every newspaper and business magazine has been giving the show. They are running lead articles in which they ask panels of business experts on their views of the show. The most amusing expert comments (to me) are the ones that criticize the show for its lack of reality to how the real business world works. Duh! Itís a TV show with great audience numbers. Why donít the experts add that Monopoly, the board game, doesnít do a very good job of reflecting the real world of capitalistic consumerism?

The point that I havenít seen made is that many of the 19MM weekly viewers do actually assume that "The Donald" is representative of successful managers and that the real business world works the way the weekly assignments and psycho-dynamics portray. Thinking about your companyís reality; on your payroll, how many employees understand these basic realities:

  • Your companyís profit as a percent of sales is a fraction of what they suspect?
  • Most or all of that profit must be reinvested into the business to finance growing working capital to support a growing business to give them job security and growth potential. It isnít 100% dividended out to shareholders. And, the amount of profits reinvested per employee per year is not sufficient to give them the economic career expectations that most would like?
  • Their wages for their job niche are set by supply and demand forces in your local market and not by a conspiracy of local business executives to keep wages artificially low?
  • Their total compensation could be, on average, 10 to 50% higher if they could be part of the total service productivity solution that raises gross margin generated per year per employee by 50 to 100% over what it currently is? (And how might we do this by working strategically smarter?)
  • We have to all work together to give which customers, which distinctive, consistent total service performance/value formula to thrive and not just survive?

Whatís your response to these questions? Is it: "Bruce, our front-line, hourly employees canít and donít want to learn that stuff. They donít want to be that responsible."

If so, then I ask, are you going to let them be part of the low service value, low productivity problem and victimize all of your company stakeholders? Or, are you going to insist that they become educated, responsible commonwealth capitalists who are part of the high performance solution, because it is in their own best interest. How many of your employees want:

  • Job security?
  • Job growth?
  • Raises, more health benefit coverage at the companyís expense?
  • Job pride, satisfaction?
  • More intellectual/emotional meaning content to what they are doing with whom, along what service processes that best serve what most important customers in which target niches?
  • Lots of opportunities for public praisings, because we are working on continuous improvement projects and job mastery that makes sense and is connected everyday to "whatís in it for me"(station WIIM)?

So, what are you going to do? Let them watch "The Apprentice" and think you and your business plans are on the par with "The Donaldís" behavior? Or, are you going to run through modules 2.1-2.12 of our video, "High Performance Distribution Ideas for All". The section is entitled: "Whatís in it for you and all stakeholders; the basics of capitalism and premium wages". For more information, check out the links on the video in the middle of our home page. Itís got a 30 day guarantee. You can buy it at a re-seller price or call us to find out how you can become part of a re-seller group.

Just think, if we let our employees get their business enrichment education from "The Donald" maybe we will be the ones who will eventually hear the "YOUR FIRED" line if we are branch managers. Maybe we hired them cheap, worked them hard and promoted products far and wide, but we still made a lousy return on our "controllable assets" (average investment in inventory and receivables).

Or, if we are the CEO maybe the bank will say when interest rates start to rise: YOU ARE IN VIOLATION OF LOAN COVENANTS. This is tantamount to saying you are now in the "zone of incipient insolvency on your way to being liquidated or bought out at a discount to book" Could an ounce of prevention now be worth a pound of cure in the not too distant future. Could a risk-free, 30-minute review of some "high performance thinking and education" materials be worthwhile?

Thatís all for this week!

Bruce

Bruce@merrifield.com

919/933-7474