March 3, 2004: Distribution Channel Commentary (DCC) # 60


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  2. "Wisdom consists of the anticipation of consequences." Norman Cousins

    "What we anticipate seldom occurs, what we least expected generally happens." Benjamin Disraeli

    "For want of a nail the shoe is lost, for want of a shoe the horse is lost, for want of a horse the rider is lost, for want of a rider the battle is lost, for want of a battle the kingdom is lost. All for the loss of a horseshoe nail." Poor Richardís Almanac #499; origin unknown.

    "Necessity is the mother of invention" is a silly proverb. "Necessity is the mother of futile dodges" is much closer to the truth. The basis of growth of modern invention is science, and science is almost wholly the outgrowth of pleasurable intellectual curiosity." Alfred North Whitehead

    "A society that refuses to strive for superfluities is likely to end up lacking in necessities." Eric Hoffer


Since last weekís commentary, the most amazing economic news to me was Greenspanís back to back appearances on Capitol Hill to tell congress about two huge elephants we have all been ignoring for years:

  • Social Security and Medicareís net present value costs are out of control and need immediate, drastic solutions (later retirement age and reduced, capped payments).
  • Fannie Mae and Freddie Mac are huge leveraged hedge funds that are subsidized rides for their management and shareholders that pose huge systemic risks to financial markets.

For good measure, Greg Mankiw, the Chairman of the Presidentís Council of Economic Advisors echoed the same concerns about Fannie and Freddie.

Hereís my question. Why would these two chaps hit on these looming, growing icebergs now? They certainly shouldnít have been surprised by the response. The powerful lobbying forces for both the Golden Geezers and Fannie/Freddie went into immediate "weíre shocked", dis-information mode. And, 100% of the committee members that oversee these two areas denied that there was really any problem, especially in an election year.

When the pilot and co-pilot of our financially engineered recovery start putting on their parachutes, so that they can tell us and the history books - "we warned you" - what do they really see or know that we donít? We can only guess, but one of their big concerns should be the real story on inflation. How much longer can these two fellows try to convince us that the "true inflation rate" is a benign .7% per year? This figure excludes all of the big expenses that we really are paying, and the rear view mirror measurement has yet to reflect the effects of basic commodity metal prices that are increasing at parabolic rates.

Here are some questions to think about:

  • Will the financial markets force the Fed to raise interest rates higher and sooner than it has been promising to all of us?
  • If so, what does that mean for the cost of carrying working capital debt pegged to prime as our debt-laden economy and business activity both cool rapidly?
  • If you distribute products that are lumber or metal intensive, should you forward buy more than you need and try to make money on rapidly rising inventory replacement costs?
  • If there is already a lot of speculative forward-buying going on in commodities around the world (especially in China), what would happen to commodity prices if interest rates go up and the US economy cools?

Whatís my advice?

  • Hedging your debt carrying costs and commodity item price increases is prudent.
  • Speculating on inventory for profit is for full-time professionals. If you canít resist betting on rapidly rising items that you are buying, figure out the worst case boom-bust, price collapse scenario and make sure that you can afford it.
  • Donít be distracted from the basics. Get back to service value improvement guided by profitable customer centric thinking Ė two big themes of both this commentary series and our "High Performance Distribution" videotape product. (Lots of video info at our home page.)

If you would like to read one best, current article on "inflationís stirrings", check out Caroline Baumís March 2nd column at this link:

Hereís one interesting factoid from the column: "the Institute for Supply Managementís indexes of prices paid and supplier deliveries both rose to nine-year highs in February. The last time these gauges were that high, the federal funds rate was 5.5 to 6%." (The current rate is 1%)


All politicians and even many experienced business folks are hopping on the protectionist bandwagon. The most common point: "Stop losing good factory jobs to Asian countries that are keeping their currency rates at artificially low, unfair rates." Here are some interesting polling statistics, which in turn drive demagogue drivel.

  • The lower the income level, the higher the percent of voters that are for job protection measures.
  • Among Americans who make $100,000+ per year support for free trade has dropped from 57% to 28% in the past five years.

If you feel yourself succumbing to the outsourcing hysteria that is growing and would like to know the real facts, the real problems and the real solutions for our "jobless recovery", I recommend the following article by John Mauldin:

If Mr. Mauldin canít convince you to be a free trader and to re-focus on reinventing your business to replace customer volume that is emigrating or evaporating, then check out a second article link below. This article points out that the US Economy has been a case study in free trade for the past 100 years. Jobs have continually migrated from high cost areas to low cost ones. The poor southern states have caught up with the rich northern ones. The rich states didnít get poorer, just more of an expanding economic pie went to the southern states.

So, what should we do?

  • We shouldnít be sucked in by the outsourcing hysteria and become part of the problem instead of part of the solution.
  • Within our own businesses, we have to reinvent both our customer facing value propositions and our back-office procurement capabilities to make excellent profits to in part reinvest to support and grow the economic ambitions of all of our companyís stakeholder groups. This may well mean buying private label, much less expensive imports from China (topics 5 & 6 below). And, outsourcing more of our total inventory carrying costs to more efficient old and new master distributors and/or importers; etc. (topic 9)
  • But, before we try any big changes we should first seek to capture the lionís share of the most potentially profitable customers within our historically most profitable, #1 niche of customers. For a quick annotated slide show review on just how to do this go to this link: Identify_Customer_Niches.pdf. While skimming through this show, print out (at least) slide #9 entitled: "Service Value Redefinition", because I will refer to it often for the next few weeks.

As an amazing affirmation of what many of you have probably sensed about our uneven, economic recovery that has been driven by borrow-and-consume activity, check out Al Batesí report for the Association of Millwork Distributors (AMD, formerly known as the National Sash and Door Jobbers Association). Al compares the growth, margin and return on asset rates for four different types of distribution channels: industrial (anemic), construction (OK), consumer (OK) and AMD (super). The AMD members do a lot of special order volume for home construction, especially for high-end McMansion activity. Hereís the link:

These types of reports that rely on channel "averages" can mask at least two things. First, the top 5% of the firms in any channel are doing very well. Because those companies are more strategically focused, disciplined and able to execute what they know they should do, they grow 2 to 5 times faster than the bottom 90% of their industry peers and they make 4 to 6 times the return on equity that the bottom 90% do. The logic of how the top 5% achieve their performance and the how-to journey of becoming like them is what our 53-module, 12 hour video entitled: "High Performance Distribution Ideas for All" is all about.

The second point that canít be measured is that the amount of economic necessity, reinvention activity increases inversely with the decline in the numbers. There has been a lot of necessity (pain) and innovation going on in the distributor-to-industry channels. In the distributor-to-housing channels, however, many have been too busy chasing a booming market to think about it ever ending. I suspect that many believe, or would like to believe, that housing values will continue to go up and miraculously turn exploding mortgage debt into after-tax equity value that can be refinanced for even more spending power. The 20-year decline in interest rates to near zero and down payments to zero can now, unfortunately, only go up. What will happen to housing valuations and carrying costs if and when interest rates rise or down payment requirements return from zero to 15 to 20%? How will the next generation of buyers be able to afford todayís prices? If there are no future buyers for those who might have to sell, what happens to valuations? Maybe it isnít too early for even the firms in hot parts of our economy for the past few years to start thinking about continuous economic value reinvention within their business models.


Conventional wisdom is that "brands" are important and "private labels" (and "non-genuine parts") are questionable value propositions. But, over the past five years private labels have grown much faster than their brand name competitors. In a recent NY Times article that I can not link to, I was intrigued to read that:

  • "Old Roy", Wal-Martís private label dog food, has become the number one selling brand in the world; and
  • According to AC Nielsen research, private label packaged goods grew 38% in the past 5 years versus 19% for brand name goods.

The trends in commercial distribution channels for commodity, price-sensitive consumables may be similar. For a thorough article on whatís going in private label activity within the medical supply channel, for example, check out this article/link from Repertoire magazine by Mark Thill:

How and when distributors make commitments to private labels over traditional supplier brands on typically the biggest volume items are all big decisions with potential risk and certain conflict with the brand name suppliers. But, the stakes and the cost differentials on clones from China have never been bigger. At the very least, every distributor needs to proactively research all procurement possibilities continuously and thoroughly. The following topic offers one more pair of case stories to ponder.


Outsource or die seems to be the emerging lesson from the US furniture industry. Here are the background facts:

  • In the past 8 years, total Chinese furniture exports to the US grew about 30% per year. Since 2001, the US has lost about 34,000 jobs in wooden furniture manufacturing or about a third of the work force.
  • As a result of a petition by furniture manufacturers, in January 04 the International Trade Commission, a US government agency, authorized a full inquiry into complaints by American furniture manufacturers that Chinese imports were being dumped and deserved high tariffs.

Two of the manufacturers that signed the petition have quite different stories. The sad story is from Vaughn-Bassett Furniture of Galax, VA. This longtime family owned business closed a factory and laid off 250 people.

The more interesting one as reported in the Wall Street Journal on a, 1-30-04, front page article entitled "As China Surges, It also Proves A Buttress to American Strength" involves Virgina-based Hooker Furniture. Here are some quotes from that article:

"an e-mail from Hookerís chief executive (to the China supplier stated) stated that Hooker looked forward to Ďan exciting future doing business with ChinaÖand wanted to continue the extraordinary growth we have had in the last few years with Asian importsí."

"Indeed, thanks largely to imports, Hooker has boomed. It closed a factory in North Carolina last summer but has boosted profits and dazzled investors with a stock that more than quadrupled in two years. "

"I donít understand what they are doing. It makes no sense," said Mr. Lin (the Taiwanese owner of the Chinese plant who received the e-mail and the trade investigation news). "If they donít import, they die. "

As I look at this, Mr. Lin is right. In China the owners are 90% from Taiwan, the investment capital is 100% from offshore sources (often US direct investment) and the raw wood is from the US. All the Chinese get out of it are subsistence jobs. If tariffs are slapped on these plants, the production will just move to other Asian countries. Production in China is not just about low wages, it is about zero to minimal regulation costs and taxes of all types throughout local supply chains. The jobs are not coming back to the US!

Whether you are a manufacturer or a distributor, there seem to be two classes of players, the outsourcing quick and the non-outsourcing dead. I know that a lot of readers donít want to read this, so I would refer you again to John Mauldinís article in topic #3 above.


If you have read everything to this point, you may have picked up on the theme of REINVENTION. So, where do we get our best ideas? I saw one survey that suggested that only one out of 100 ideas happens at work. As Archimedes proved, a lot of our "Eureka!" moments happened while shaving or showering. Perhaps the key is to research some problem intensely and then relax somewhere away from the office where too many urgent tasks and interruptions militate against creative, mental connections.

But, with all due respect to "creative best practices", I think we would do best to continue to solve value gap problems between what our target customers tell us they need and what we may be measurably (not) delivering. For one guiding picture to tape to the wall, go to slide #9 from within our annotated slide show #10 at our web site and print it out (if you havenít already). The slide is entitled "service value redefinition", and here again is the link to the slide now: Identify_Customer_Niches.pdf.

All companies claim that they do the first five steps within slide #9. But, I think that 95% of the companies in mature industries in the US could do a lot better at all 5 steps starting most importantly with step #1. Who are the most profitable customers that you have in your most profitable, historic #1 niche of customers? Then, for more on how to do step #2 better (listen to those customers more deeply and thoroughly to more define "perfect service+" (see last weekís commentary #59, topic 3 59commentary.asp) (In the upper hand corner of our home page, you can access all past commentaries.)

Remember to tape slide #9 up somewhere, because I will continue to refer to it in this commentary and in future ones.


The "University of Industrial Distribution" is back! The four-day program that will run next week has sold out for the first time ever. Back in 2001, the twice-per year program was canceled along with most companies discretionary spending on all educational fare. For a number of reasons, bookings have surged for the always-improving curriculum. For those of you who might be interested, here is the web site address ( I will let readers know if and when they offer the course again.

The particular course that I will be teaching next Wednesday will be geared towards "branch managers", but it will include a lot of the concepts that are covered in our "High PerformanceÖ" video as well as my on-line masters course for Texas A&M entitled "Reinventing Distributor Profitability".

In case you are interested in a free, audit-the-class-curriculum look for my on-line course, I have started to post the weekly assignments for the on-line course at my web site under the "exhibits" button. For the first three weeks, I asked the students to read the first three chapters of my currently stalled book. These are posted on our home page. I also posed discussion questions to them to which they respond in a private, on-line discussion forum.

The assignments for weeks 4 through 7 plus the discussion questions are now posted in the exhibits section for your browsing enjoyment. Here are the links:
./exhibits/Assignment for Weeks 4 & 5.asp
./exhibits/Assignment for Week 6.asp
./exhibits/Assignment for Week 7.asp


There seem to be three emerging groups of distributors. The ones that have wireless bar coding woven throughout the processes within their typically large scale warehouses. The small distributors with a traditionally more messy looking facility with a higher, picking-error rate performance. And, a third group that is outsourcing more of their total warehouse activity to traditional master distributors such as Dot (foodservice), LaGassee (jan-san), ORS Nasco (welding supplies) are now in a few channels to large, regional distributors. These regional big guys were, heretofore, perceived as competitors to the little operators with strong counter, cash-n-carry activity. But, as they compare and contrast their customer portfolios, they realize that the competitive over-laps are minor in comparison to the possible synergistic benefits that they could create.

The move towards more channel volume going through master distributors is being supported by at least three forces:
a) There is both a cost/size barrier to entry and cost reduction benefits from warehouse automation systems.
b) More manufacturers are starting to understand that they, like distributors, are getting hammered by too many small orders from all types of customers, so they are expanding their use of master wholesalers that give them a lower total sales/service cost with a broader reach. The manufacturers can then selectively raise their shipping terms and minimums. And,
c) as more goods are being made in Asia, they must come through some sort of one-stop-shop, container-load breakdown warehouse or "master distribution" facility.

Heretofore, little distributors and dealers might have joined a buying group to try to buy as well as the big guys do from domestic manufacturers. But, what happens if and when manufacturers crack down on small order accounts and buying groups have new re-sourcing from Asia challenges that also present new logistical challenges. Instead of backward-integrating into the master distribution business, especially when the capacity and competency may already exist within the channel, how might buying groups partner with traditional or new, potential master distributors? Right now, Iím seeing some new experiments going on in the master distribution space. If anyone in reader land would like to visit more on this trend, let me know.

Thatís all for this week!