February 25, 2004: Distribution Channel Commentary (DCC) # 59


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  2. "Price is what you pay. Value is what you get." Warren Buffet

    "Quality in a product or service is not what the supplier puts in. Itís what the customer gets out and is willing to pay for. Customers pay only for what is of use to them and gives them value. Nothing else constitutes quality." Peter Drucker

    "You canít manage what you canít measure. You canít measure what you canít describe." Robert Kaplin and David Norton authors of the "The Balanced Scorecard".

    "In God we trust, all others bring data." Edwards Deming


Last week I did two, all-day seminars for the California Lumber Dealers Association (one in Northern CA, one in Southern CA). The association got "associate member" wholesalers to sponsor the seminars with fees that allowed them to bring a certain number of their own people and their customers (dealers), so the wholesalers became important marketing, letís learn together, agents. The attendance was excellent. I was interested to see what the dealers at the epicenter of the mythical (?) U.S. "housing bubble" had to say about the bubble and how profitable they were in a booming market.

Is the housing bubble fact or fiction? Economic views were only shared privately during breaks, because many of the people in attendance wouldnít want to hear any discouraging facts anyway. About half of the principals were concerned, however, because they still remember the fierce downturn and deflation that happened in California housing from í92 to í95. The other half of the principals, and most of the lieutenants, seemed to have forgotten the Ď92-95 patch of history; they just wanted to believe that this time it was different. It was as though some new natural law had evolved and Southern CA housing should appreciate 20% per year in perpetuity without any value overshoot.

How about the profits those dealers must be making during a housing boom? Most, surprisingly, were just doing OK. I had attendees anonymously write down on file cards the question(s) that they would like to have addressed during the seminar. A number came back regarding getting paid more for commodity items. For that set of questions, hereís what I told them:

  1. Naked commodities will always sell for the lowest price, but that proposition is rarely the lowest total procurement cost or value for most customers. The wholesale clubs, for example, have the lowest prices for retail consumable commodities, but they are only getting 5% of total consumable dollars spent in the US. Half of the volume comes from consumers, half from small businesses. The other 95% of consuming America dollars are like votes that go to other retail formats that offer a better total value combination of location - services - product selections - at higher prices. We have to figure out for each target niche of customers what the total service value product is.
  2. A general big picture formula is that: "value" in the customerís mind must exceed the price which must exceed the cost of supplying the total product solution so that there will be a worthwhile profit left over. Research has proven that a service provider who has a distinctive service value edge in the customerís mind can charge about 5 to 10% more than the average service providers "value-added margin". What that means for distributors is that if an average competitor is quoting a 20% margin, then the distinctive service player can charge 21% to 22% and still get the business. Their higher value proposition will support a higher price.
  3. The sequential challenges of:
  • targeting the right niche of customers,
  • listening better and deeper to the right customers within the niche to define "service value excellence" in a measurable way
  • then, achieving, selling, getting paid for and leveraging basic service value for a high performance profit

is an involved journey and story. (If you would like 150,000+ words on this journey and more in 53 bite size videotape modules, go to www.merrifield.com and click on the links regarding out videotape product entitled: "High Performance Distribution Ideas for All.")

     d.   For more right now, you might want to check out:

For one best-annotated slide show go to: Dist_VAlue_proposition.pdf.

For a written article overview, skim article 1.5 on my site to get the big picture about "re-organizing around the customer" at this link: 1_5.asp.

Read article 3.1 entitled "How to Define Perfect Service" at this link: 3_1.asp.

Read article 3.5 entitled: "Earn High Returns with Heroic Recoveries" at this link: 3_5.asp.

Check out this exhibit which details "8 elements of service excellence" and how they both benefit the distribution company and lower the customers' TPC buying activity. ./exhibits/8elements.pdf.

Skim through my annotated slide show on "Services for Fees". As we listen to customers, we will find that there are extra services that we could do for them, but the profit/transaction flow from all customers will not support all (extra) services. So, we will have to segment customers and serve them differently. The very best will get extras for free and the smallest, most expensive will not get some traditional basic services except for perhaps a fee. This is just like what the banks have been doing to all of us with their 7 to 15 stratifications for consumers. Here's the link: Fees_for_Services_slides.pdf.

Does this all sound too difficult to do? "Inch by inch (video module by video module) it's a cinch, yard by yard is very hard."

Remember, every company says that they listen to their best customers to continually improve and re-tune their total service value proposition, but most donít do it very well. For starters, choose your right customers better by using customer profitability ranking reports to zero in on the best core and target customers within your number one historic, most profitable niche. Then, improve fill-rates for that niche of customers very strategically. How? Skim through "chapter one" of our "forthcoming book" (maybe next fall) to get to page 21 and read how ABC Supply did it!


Bruce, what is the one slide that depicts the competitive service value creation challenge that we all have within industries with too much capacity for too much commodity product volume? See slide #9 in the annotated slide show entitled: "Identify Best Customer Niches for Profit Maximization" at this link:

Identify_Customer_Niches.pdf. We all need to do the first 5 steps of this chronological and repetitive process much better.

This slide show, incidentally, explains the simple customer profitability ranking formula that ABC Supply used in the last paragraph of topic 2 above. The formula helped them to target the right customers to listen too, but how did they listen better?

I would suggest that you go out to both core and target accounts in your number one niche, and ask these first level questions:

  • Who have you bought from over the years; how have you chosen your #1 supplier(s)?
  • If and when you switched considerable purchasing needs from one supplier to another, why did you switch? What were the negatives that pushed you away from one and what were the positives that attracted you to the other? (If they have always bought from one supplier for psychological reasons, they wonít buy for value until perhaps after the buying-decision maker leaves. If they switch too frequently for price, then they probably are not currently able to understand or make a win-win, value-replenishment relationship work. We need to target those customers who switch carefully for true value reasons.)
  • What do we, or suppliers like us, do that bothers you and/or costs you the most in lost productivity, sales, extra purchasing activity costs, etc? (To ask them specifically what their definition of "total procurement cost" is and how they measure it is too embarrassing and threatening for most, because they donít measure it. Intuitive value buyers can be, however, carefully and patiently taught over time.) Listen carefully, the opposite of their frustration stories is a service value and metric that they will pay for if you do it perfectly and consistently.

For next level insights, you might ask them to walk you through their chronological process for choosing products, then vendors and then their internal procedure from order placement through to payment. Focus on their activities and their "outcomes" as far as lost time, extra hassle work, etc. If you identify pain points that might be taken away with basic service guarantees or extra services, ask them how much they would value and pay/reward that service improvement. We can only do what they will value and pay for that exceeds our cost for doing it.

If you can find customers that will really let you examine their total process and staple yourself to both the purchasing paperwork and product flow through their place, you can to use an exhibit at our site entitled: "Process Re-engineering x Services" at this link: ./exhibits/processx.asp.

With fresh insights on how to better create and deliver service value for a target customer niche, we need to go back to our company and start to:

  • Measure the basic elements of service excellence on the wall everyday.
  • Apply the re-engineering services exhibit mentioned above to our own internal service processes.
  • Sign up all employees to be part of the service re-invention process. They are all either part of the solution or part of the problem. (If you need an educational tool to help you do this, we can suggest a video!)

We will stop here on the service reinvention service process, but for further inspiration to get going on the first two steps check out the case study reads below.


The mid-priced, limited-service hotel segment is super competitive. Hampton Inns was rated #1 in 2001 for total customer satisfaction, but it fell to 2nd in 2002 and 4th in 2003. "The benchmark has been raised by the competition", so it has come time to "revisit certain aspects of the product". (Remember the service reinvention process slide in topic 3 above is a continuous merry go round. Those companies that can continue to learn faster than the competition win.)

So, Hampton Inns management went through the entire customer experience process and identified 127 improvements including their own custom designed and built alarm clock. The overall goal is to achieve a service value edge and a "wow" effect. Because the franchisees have to shell out the upgrade money and effort to upgrade the consistent image of the entire chain, they put together a mock-up of the entryway, etc. for 700 franchisees to walk through. If you are a top manager of a distribution chain, you can do the first two steps of the service re-invention process for each of your branches. But, how do you get the branch managers (like Hampton Inns franchisees) to want to make the service process changes within the branch happen? Hereís the link to a short, fascinating and inspiration article out of USA Todayís 1-28-04 issue: http://www.usatoday.com/travel/news/2004-01-28-hampton_x.htm.

CASE # 2:

UPS has a giant, slow-growing core business that throws off more cash than can be reinvested into the coreís growth potential. What to do to continue to grow? UPSí Supply Chain Solutions (SCS) division is now 8% of their total volume and growing like a weed. UPS has broadened their scope of logistical activity and has targeted many commercial customersí desires to outsource non-core activities to third parties, whether it involves small package delivery or not.

Many distributors are in channels in which total volume isnít growing and it is even shrinking. If you would like to get some ideas on how you might spin-out a new division that identifies outsourcing business opportunities within your existing customer base and then creates, delivers and charges services for fees, you might want to read through the Fast Company article entitled: "Surprise Package". Hereís the link: http://www.fastcompany.com/magazine/79/ups.html.


A client of mine, who calls sporadically for "two minutes of wisdom on a Tuesday afternoon", has gotten great results by hiring a local-area, part-time, coach. You have to first understand a few things about this chap. First, he did not want to go into the familyís distribution business (one location, 50+ employees). But, his father died at an unexpectedly early age, and his family pressed him to quit a job in another industry to become the acting CEO of the business. Second, heís a low-key fellow who has no ego needs to try and be the great leader that all stakeholders wish he would be, and he has a good grip on what his true strengths and weaknesses are. He is very open about how he is trying to create a "whole-brained management team". And third, because he worked summers in the business while going through school, there is an entrenched, core group of managers who are 5 to 20 years older than he is who have mixed feelings about an industry-beginner telling them what to do.

His very effective total management solution has been to:

  • Use me and our "High Performance" videotape kit to measurably define what the companyís best, historic, number one niche(s) of customers are, etc.
  • Do the service re-invention definition step, butÖ.
  • Then, have the coach be the driving, leading force for changing the company. The coach is a no-nonsense, experienced marketing executive who spends one to three hours a week on site or on the phone with core management group employees, and then runs a 4 to 6 hour management progress meeting each month. The Coach is in a sense a part-time, chief operating and marketing executive.
  • Every core group member has published "to do lists" with metrics and timetables attached that are updated weekly and copied to all other core group members.
  • Everyone is tied into the same gainsharing bonus pool that in turn is targeted first to improvement in pre-tax return on total assets, then when the target level is reached it will be modified to reflect growth in profits.
  • My client acts as "chairman" of the committee and "chief financial officer."
  • He has also identified two local firms to which he has outsourced human resource administrivia and some key financial accounting/reporting activity.

I could go on. The point is that most small businesses are not going to have an all-in-one CEO who can be excellence at all functional activities. Nor, is the business going to be large enough to be able to both afford and effectively use super-star, proactive, strategic, can-do functional VPís. But, in our current economy there is no shortage of mature, executive talent who have been retired sooner than they like. The obvious solution for making the big changes that tough times demand is to tap into the part-time talent pool that has been created by the same tough times.

Where would you find part-time VPís for (fill in the blank)? You might start by writing down who you might be looking for and for how many hours/week and see what you local accounting, legal and banking suppliers might suggest. Professional service firms may even have staff on board that could fit the bill, and/or they might well know of free-lance, local consultants who might be the answer.

My client is evolving a virtual advisory board. He hasnít seen the need to have some number of people on a "board" that actually meets physically on a quarterly basis whether they need to or not. He is, instead, systematically filling his whole-brained holes and has introduced the different outside resources to each other as needed. I, for example, have communicated with the Coach over the phone and via email several times as well as a few teleconference calls involving the Coach and other core members. I have not met or yet communicated with the other resources.

Interesting times require interesting, new solutions!


Thatís all for this week!