December 18, 2002 Commentary # 5




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RE-PURPOSING COMMENTARY CONTENT ON OTHER SITES: The answer is “yes.” What is the possibility?



This is the third of three commentaries that have been stressing ideas for doing things better in 2003. (Think: “What’s our corporate New Year’s resolution that’s going to happen this time!”) Calendar year-end companies do a lot of reviewing and re-planning in December. If your success rates for 2002’s  plans fell short, then we hope our intellectual food for thought might help.  


THIS WEEK’S TOPICS: (next publication 1-8-03)








Because we are unconsciously biased to see (hear) what we want to, you might check to see which of the following forecasts that range from OK- (the best I could find) to Grim.


a.       12-16; Bloomberg News survey; “U.S. Economy Growth to Accelerate in 2003 2nd Half”

“The GDP may expand 2.8% in 2003 up from this year’s projected 2.4% growth. Growth will accelerate from 2.5% in the first quarter to 3% in the second quarter to (eventually) 3.7% in the fourth quarter. (This is the most optimistic forecast that I have seen.)

b.       (12-12; “World Bank Warns of (global) Recession”{66D12D1C-B4D9-405E-8660-255A5399D582}) “The global economy faces a significant risk of sliding back into recession in 2003…the Washington-based lender to third world countries slashed its global growth forecast to 2.5% for 2003 down from 3.9% just six months ago. After growth of 1.1% in 2001, the bank expects growth of 1.7% this year.” (The World Bank considers 2% or less a “recession”, because both productivity and population growth rates will support a higher global “output capacity.” Net new jobs are not created globally until the growth rate goes past 2%; they shrink below 2%.)

c.        11-22: “Bear Trap?” by Stephen Roach (Disclosure: he’s one of my favorite economic gurus!)

“The S and P 500 is now up 20% from its October lows (and has since drifted downward), little different from its two preceding rebounds – 21% recoveries off both the 9-21-01 low as well as off the 7-24-02 low. In each of those two earlier instances, there was hope that meaningful cyclical revival was at hand…(but) another rally falls victim to lingering weakness in the US economy…..As I see it, the US economy remains stuck in a subpar growth channel, at best – with real GDP growth averaging around 2%…restrained by the headwinds of excess debt, subpar saving, excess capacity, a massive current account deficit and the lack of pent-up demand, there is a compelling case for a persistently subpar recovery, in my view.”

d.       12-18-02 “Best of Bill Buckler”

A short, hard-hitting, fact-based analysis of the huge money supply inflation that the Fed has orchestrated, especially over the past 7 weeks, to cause an incipient dollar devaluation crisis along with the implication that it will not revive the economy.


            Of the four above, only Roach has had accurate forecasts going back to mid ’01. The rest of US economists in general have been significantly and optimistically wrong for three years. Most still are using rear-view mirror models based on interest rates and money supply effects since WW2. They don’t focus on the global debt load/exhaustion problem and the chronic excess capacity problem in manufacturing caused by the super-fast, unprecedented ascent of China.


            Now, let’s blend in some late breaking news mixed with some commentary:


a.       12-17 Industrial production was up .1% in November. Factory usage was at 75.6% capacity. (The worst reading for capacity utilization was in December 2001 at 74.6%, an 18-year low. 1% improvement in a year? Aren’t we supposed to be cutting our “excess capacity”? Sure. But, what if as fast as US manufacturing capacity is being closed, new more efficient, copy-cat capacity is being created in China for US export? High-wage factory job lay-offs have continued steadily for the past 30 months. These folks may have found new service jobs at much lower wages and benefits. Here’s an equation for what’s going on: BIG PERSONAL DEBT + LAYOFFS = CONSUMER LOAN DEFAULT rates increasing steadily into the future.  

b.       A Merrill Lynch study concludes that consumer spending will continue steadily into next year when commercial capital expenditure will finally take off. Spending power exists, because cash-out, refinancings of mortgages is still happening. But, what if and when will the consumer decide to use the proceeds to pay down more expensive credit card loans and have a cash cushion. Are there signs that the consumer is finally starting to save? If so, it could keep the economy quite cool in 2003? Auto and retail sales look foreboding. (below).

c.        12-17 GM announced that it would be forced to cut production by 400,000 cars next year. It appears that cars have piled up on dealer lots because year-to-year sales in the fourth quarter are off 11% in spite of the fact that zero-zero-zero financing schemes are cutting average prices by over 11% more than last year’s fourth-quarter, “zero interest” deals. Zero-cost financing has also been prevalent in the furniture, appliance and electronic goods channels. Are fourth quarter consumer sales (as anemic as they might be) being stolen from 2003 sales?

d.       Let’s look at this week’s retail news. Wal-Mart reported that sales last week were at the low end of their forecast. This suggests to me that most higher-priced stores could be doing worse. McDonalds will report the first loss ever after 8 straight quarters of declining profits . FAO (Schwatz) is threatening bankruptcy with their bank (Wells Fargo). Best Buy reduced their fourth quarter forecast. Circuit City posted a third quarter loss due to price cuts and sales of fewer higher margin goods. K-Mart’s stock sank to 25 cents per share and went to the pink sheets; it’s closing stores rapidly and trying to find a niche with minorities. Target said its December sales were below expectations. Even (grocery, gotta eat companies) SuperValu and Albertson’s reported profit declines for their latest quarters because of deflation in their product lines and price competition from Wal-Mart supercenters. Where will the US economy get the demand stimulation it needs to get going in 2003? (next point)

e.       The Fed and Fannie Mae are doing their best to promote evermore borrowing and consuming our way to prosperity financing schemes. Federal Reserve governor Bernanke stated on Nov. 21st that:  "The US government has a technology, called a printing press or today, its electronic equivalent that allows it to produce as many US dollars as it wishes at essentially no cost.”  He then went on to tell how the Fed would do whatever it would take, including the production of US dollars, to avoid deflation and to keep interest rates low. Is it any wonder that the price of gold has since taken off while the US dollar’s relative value to other currencies has started to drop. Will all the cheap, extra money creation keep flowing into housing stock, the last great asset bubble? (For more on the housing bubble topping, see commentary topic #2 – 2) Fannie Mae and the entire mortgage-industry food chain have been conspiring with tract builders and sham charities to keep the low end of the housing market going. FHA approved house deals require a 3% downpayment that builders are forbidden to contribute. So, now they give the money to special charities that in turn give the down payments to would be buyers. The charities even have a trade group with the acronym “HAND.” Delinquent payment rates are now exploding. To read about this financial train-wreck on its way to happening that tax-payers will underwrite, go to this URL:


I could go on, but what’s my final take? I agree with Stephen Roach above. I think that the US economy will continue to muddle along at a rate that is below its “output capacity” which means rising unemployment and consumer default rates on loans of all sorts. There will be continued deflation in manufactured goods and no pricing power in the physical goods channel. Distributors could re-invent themselves operationally to achieve superior service economics power to improve profitability and growth through better retention rates of best customers. But, most will try another round of financial cost cutting. Can multiple rounds of “downsize and upgrade” cost cutting work in service businesses over several years? Two big concerns that come to mind are: 1) Morale and losing the best, young people. If we keep cutting back the oats on the horse (our employees), then the horse will die or our best, young employees will leave first in spirit and then in body. Overpaid veterans who have been coasting for some time and weak employees who have no next best alternative will stay and increase their passive aggressive behavior. And, 2) how is cost cutting creating any sustainable, competitive, unique, value-added edge or exploring new living edge opportunities to replace old profit streams that are drying up? If more than one player in the market cuts costs to have a little crummier service, then any savings will be competed away, because price will be the only differentiator for two or more players with me too products. A more complete success formula for a corporate New Year’s resolution follows.




      In tough times, I believe that you can only once – freeze wages; lay off some marginal performers to upgrade the average quality of who remains; cut discretionary expenses (investments?) like dues, travel, education; and preach try harder until the (3 to 9 month) recession passes. If you do it again the next year without some big picture education and re-thinking for all employees to give them some intellectually sound new solutions, then the depression, anxiety and loss of confidence in leadership sets in. It’s a lucky thing owner-operator CEOs can’t be voted out of office when the misery index gets too high for too long.


      Here are some highlights for the last, usually missing, three steps for a turnaround revival at a distribution location:


“REFOCUS’ (on most profitable stuff). For ideas on refocusing on what a company does best and most profitably bag the financial management and product pushing strategies and focus on customer profitability applications. For more on this order our free E-Booklet and check out articles numbered 11 through 14 on customer profitability.


If you would like other perspectives on customer profitability, read Brent Grover’s article entitled “Think About Your Customer Investment Portfolio.” It’s in the latest issue of Modern Distribution Management (12-10-02 issue; Or, we have his permission to email you a copy of it in a word document file if you contact If you want to invest further in activity based costing software for a distribution environment, there are two products that I know of out there. One is a windows application entitled “Customer Profitability Analysis” (CPA). It is authored and sold by Stephen Pearce ( The other is an ERP-add-on application by Acorn Systems ( which they sell through ERP distribution software vendors like NxTrend, IDS, Tecsys and Daly.commerce. (For yet more on the “refocus” step, see topic three below).


RETHINK involves a lot. Here are some suggestions with references.

1.       Question many unspoken, flawed operating assumptions with the management team,. Do this because total management team buy in is vital before sharing the overhauled, updated beliefs with the rest of the employees.

2.       For an agenda of assumptions to discuss with the management team read through our E-Booklet. Most of the advice will seem dramatically different from past operating practices, but why not? No company is going to get big gains without big cumulative change starting with management thinking.

3.       Just for starters realize that 100% of high performance companies are “open book” with all employees in order to make them more educated, responsible and continuously improving. If you can’t score what you are doing and what’s in it for you, then you sit and do only what you are told. Read E-Booklet articles 9, 8 and 6 for more.

4.        Cut order error rates by 50% within 1 month with the ideas in article #3.9 “TQM Resuscitation Tactics” located under the “articles” tab at

5.       Make it all happen in a credible, affordable, bite-sized discussion way with our guaranteed, turnaround-revival solution in a box entitled “High Performance Distribution Ideas for All.” It is most affordably bought through one of our re-sellers (they are in the E-Booklet). To quote a happy distribution executive: “It (the video) is the best, cost-benefit, slam-dunk, transformational catalyst we have ever seen”



REVIVE every (competent) employee’s hope that:

a.       They can personally become more in control of their job’s destiny and economic expectations as well as the company’s collective well-being.

b.       They can make a direct and indirect service excellence difference as far as cracking and improving target accounts.

c.        Selling more core products to core customers and best target accounts can really happen.

d.       Free-riders or cross-subsidized employees will either shape up or out.

e.       Of course, the subsidized employees will be stressed by the new, transparent culture and either get with the program or leave opening places for a new breed of recruit-able employee.


For some key articles that support this step, go to and check out #s:

5.12, 5.10, 5.7, and the rest of section 5. We also recommend our audiotape product, “Hiring, Training and Keeping the Best Employees” which is 6 hours of me talking at my usual 300 words a minute with gusts up to 450. It was made from an all-day seminar that I did on the subject in the early ‘90s. It only costs $95, and it gets rave reviews, especially from execs with a lot of drive time.




How should a distributor define their “historic, #1 best niche”? It is where the firm makes it most money at the intersection of the most profitable products being sold to most profitable customers. These customer-product combinations will generate up to 150% of a firm’s profits to then cross-subsidize all of the losing products and customers that we all know we have. Unless a distributor has an exclusive franchise from a manufacturer that assures them of making money even if they are a bottom 20%-ile operator in an inherently poor market location, the logical, primary driver of profits is a group of homogeneous customers. This group will buy a similar assortment of best moving products in large, frequent quantities with semi-automated, routinized methods on both the buy and sell side.  


How can we more precisely define this group of customers? A simple customer profitability ranking report based on transaction cost assumptions is sufficient. For more specifics, see article #2.3; the E-booklet articles #ed 11-14; and for the most detailed analysis and action plan ideas: video modules #ed 3.5 – 3.11.


Further profitability analysis on an individual product SKU (stock keeping unit) basis can help. Rank all items by total volume sold out of the warehouse with additional columns for: average inventory balance, turns, est. GM% (a guesstimate plug in) to then calculate the last two columns for estimated annual gross margin $ and “turn x earn” product. As an embellishment to the customer profitability report it would be interesting to port in columns for the total number of picks, lines and/or lines/ transaction for every customer. Customers who buy a high number of items per invoice receive a much better total procurement cost benefit from a distributor than a customer who buys just one item. The more items a customer buys from you, the more they should want to buy from you if they have other miscellaneous suppliers that you might consolidate out of the account. These customers also have very disciplined internal replenishment systems in contrast to accounts that have lots of rush order requests, because their reorder points are zero-and-I-need-it-now! 


What customers are we ultimately looking for? Within the top 10+ most profitable customers, we should be able to identify a homogeneous sub-group (rarely two such groups) that is buying a lot of our most frequently requested items. Once we can identify and personify such a vital group, then we can do what we have been doing with them and others like them much better.



For specifics on how we should:

a.       Re-interview these most important customers;

b.       Re-define more precisely exactly what “perfect service” is for this niche;

c.        Identify new items that they all buy from miscellaneous suppliers that we could stock in order to further consolidate their total procurement costs;

d.       Use them as on-going advisors for all of our service value-added ideas;

e.       And, use them to personify the niche to all employees in a motivating and educational way-

see article #ed 5.8 and video modules 3.1 to 3.4.




“Appreciative Inquiry” is an emerging body of soft business science that takes the idea of “feed the winners and ignore or starve the losers” to an exhaustive level to insure successful implementation of ideas that you know should work, but don’t. For some background research on the net, here are two starter site URLs: and (a One Minute Manager style of book selling site).


Here’s most every distributor’s opportunity. If all employees could know:

a.       Who the most important profit-generating customers are;

b.       Why these customers are so profitable;

c.        Why their profitability is so important to all employees;

d.       What the employees can do to specifically and consistently to keep them, grow them and get more customers like them;

e.       And, why doing any new activities will be relatively easy and involve the most cooperative, appreciative group of customers –


THEN, don’t you think that the employees could get sufficiently excited about being part of this new, improved solution that the odds of success go way up! (?)


            Read more on AI and see if it isn’t a methodology that will help your company do what it does best a lot better assuming you know which #1 niche to work with first on what specific opportunities.



            That’s all for this week. We will back in the New Year. Happy Holidays!    



Bruce Merrifield