April 7, 2004: Distribution Channel Commentary (DCC) # 65


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With a tip of the hat to my #1 management material man, Tenney Campbell, here are some thoughts to ponder:

  • "These are my principles. If you donít like them, I have others." Groucho Marx
  • "With most men, unbelief in one thing springs from blind belief in another."

George Lichtenberg, German Physics professor, (1742-1799)

  • The ultimate decision about what is accepted as right and wrong will be made not by individual human wisdom, but by the disappearance of the groups that have adhered to the Ďwrong beliefí" F.A. Hayek, Austrian Economist, Nobel Prize winner, author of:"The Road to Serfdo"; "The Fatal Conceit" (1899-1992)
  • "Ideas about organization are always based on implicit images and metaphors that persuade us to see, understand and manage situations in a particular way. Metaphors create insight, but they can also distort. They have strengths, but they also distort. In creating ways of seeing, they create ways of not seeing. There can be no single theory or metaphor that gives an all-purpose point of view, and there are no simple Ďcorrect theoryí for structuring everything we do. The challenge facing modern managers is to become accomplished in the art of using metaphor to find new ways of seeing, understanding and shaping their actions." Gareth Morgan, contemporary business author Ė "Images of the Organization"
  • There are no favorable winds for those who have no direction. Lucius Annaeus Seneca, Roman philosopher and moralist (4 BC - 65 AD).


Some readers may have read my review on the Oscar-winning documentary film, "The Fog of War, centered around an extensive, live interview with an 85-year-old Robert McNamara. I highly recommended it, and after the news spinning of the past week on the Iraq war and our economic recovery the movie seems even more relevant. For quick reference, the review is in DCC # 63.3 at this link: 62commentary.asp.

If you donít trust my opinion, go to ĎRottenTomatoes.com" and read the 110 out of 112 media reviews that rated it as "fresh" and gave it an average rating of 8.3 out of ten, hereís the direct link: http://www.rottentomatoes.com/m/TheFogofWar-1126863/.

The movieís sub-title and organization is built around "11 lessons" that the director/producer gleaned from the interview. I found a summary of the "11 lessons" on the web and made an exhibit at my site for as a quick reference tool. The lessons are the directorís choices and the short summations are some chapís in cyber-space, not mine, but they suffice. Hereís the link to a one-page document that summarizes the 11 lessons: ./exhibits/Fog_of_War.asp.

Now, before we tackle the ideologically loaded issues of how we are doing in Iraq and how are economy is doing, especially in light of the past weekís news, can we all accept the following general truths:

  • Most democratic politicians are guilty. More or less, of using demagoguery because it unfortunately works with voters who wonít ever be as informed as they need to be to vote intelligently.
  • All White House spin, under lots of presidents, has strayed into fiction which is why a "fog of war" or a fog of economic reality can develop when tough times are happening. Voters donít really want to see or hear about this. Johnson on Vietnam. Nixon on Watergate. Bill Clintonís silly semantic loopholes on his sex life. Ronald Reaganís story telling that tended to stray a bit from the truth and were minimized by his aides as just the Gipper sharing "parables" or "notions" that reflected larger truths as he saw them.
  • Most administrations use a standard set of techniques for favorable spin effects. Such as: holding back, minimizing and airbrushing negative - documents, officials, information and images - while amplifying and taking credit for any good news; inventing the daily photo op and sound bite for the evening news; and denigrating anyone who disagrees with its version of reality. All of these techniques create illusions, delusions and confusion for different groups of voters. Many necessarily just fall back on ideological sides of the argument as a short cut for really finding out what the real facts and the best real solutions might be.
  • Both top-down and bottom-up news spin goes on in corporations too. The warping of the news can be potentially in proportion to the size of the business and the layers of management from the top to the bottom. Biggest companies can have biggest emperors with the biggest problems. Itís all part of the human scene.

Now to the news disconnects on Iraq. What do you make of the briefings by Paul Bremer, military officials and President Bush who all insist that democracy and stability are taking root in Iraq even after last Sunday's bestial block party in Falluja has now escalated into a two-front, mini war as Sadr's militia does itís best to start a civil war between Shiite and Sunni? How much power, credibility and effect will the new "governing council" have over the fractious, historically repressed and abused sub-elements of Iraq which also include Kurds, Turkomans?

The Iraq mess reminds me a bit of how Tito kept the peace in Yugoslavia for 45 years with an iron fist. When the Soviets let Eastern Europe go free, Yugoslavia broke back into old countries that started fighting about 1000-year-old land and atrocity grudges. Things seem settled right now, because of the constant presence of US and UN troops throughout the former Yugoslavian region.

Gentle readers, are we getting mired in an escalating mess in Iraq with no quick way out? Are there similar parallels to the Vietnam War in which McNamara pleaded with Kennedy in í63, Johnson in í65 and then again in í67 to get out. (The taped phone conversations are in the movie; McNamara got fired over a big private memo he sent Johnson in í67). In the "11 lessons", I refer you specifically to lessons #-ed 6, 7 and 8: "get the data; seeing and believing are both often wrong; and be prepared to reexamine your reasoning".

As for getting some more data on Iraq, here is a source for the running cost to the US for this war. All Iraq expenses are not part of the official government budget or reported deficit numbers; they are off budget. Year to year increases in Federal debt instruments is running at about $700B, which does include the financing of the Iraq war. "Get the data"; you can find some economic data at www.costofwar.com.

As for re-examining our reasoning and naming the unspoken assumptions and metaphors that we might be using, what should "the war on terrorism" mean? Should we declare war on countries to go after individual terrorists? Can one country impose a new political, social, economic order on another without an overwhelming bottom up cooperative spirit of that country and without universal cooperation from other nations? Can one country economically afford a unilateral effort?

Although I disagree with some of George Sorosí political thinking and money-making tactics, I will admit that he is a thinker and a doer who puts his money where his mouth is. Hereís a recent op-ed piece that he wrote about Iraq in which he is practicing lessons 6 through 8. As contentious as this exercise may be, it is necessary for nation management as well as business management. Hereís the link: http://www.axisoflogic.com/artman/publish/article_6159.shtml.

Next, letís take a second look at the Fog of Economic Recovery. We had a one-two punch of good, well-timed, economic news this past week:

  • On Thursday, 4-1, the long-delayed, newly calculated Producer Price Index for February was released by the government. It reported that the PPI rose 0.1 percent in February, slowing from a 0.6 percent rate in January. The month long delay was due to "statistical difficulties". Whew, arenít you glad that there isnít any inflation in your in-bound products, this means that the Fed can keep interest rates at 1%, and the Japanese should want to continue to buy our long-term debt for a 5% interest rate. Why do you think the government chose to release the no inflation news right before the "happy days are here again" job news on Friday?
  • On Friday, 4-2, the government reported that 308,000 net, new jobs were created in the US in March. The stock market rallied big time, while the bond market sold off significantly. But, is the number really fact or fiction?

Because global inflation is in fact taking off and temp agencies around the country arenít seeing or participating in the new jobs being created, more people are starting to dig into the details of how the government comes up with their stats. Here are some links to independent analysis work that sees the numbers a bit differently:

If you want to read about why the year-to-year decrease in take home spending for all jobs in the US is a net minus number of 1.2%, check out the link below. In a consumer-driven economy, more jobs are important, but if the jobs pay net less, it doesnít augur well for future growth. Hereís the link: http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=31571.

If you want to know how trumped up the 308,000 new jobs figure might be, here are some excerpts from:

"The King Report" by M. Ramsey King Securities, Inc dated: Monday April 5, 2004 Ė Issue 2890 "Independent View of the News."

"Ö.We have never seen such a grossly misinterpreted Employment Report in our 30 years in this biz. But the nature of the wise-guy-dominated markets is to shoot first and analysis later. So if you donít want to know the truth or if in the words of Jack Nicholson "You canít handle the truth" ignore the following.

About release of the report, we immediately noticed some huge red flags. A) How could non-farm payrolls explode 308k when a) the unemployment rate increased to 5.7% from 5.6%? B) Wage growth was less than expected at 0.1%? C) The "employed population ratio" actually FELL to 62.1% from 62.2%? D) The total employment was unchanged at 138.3mM? And, most importantly F) the average workweek fell 0.1 to 33.7, which is near a 40-year low (33.5)!

When dissecting the numbers we learned that NSA service job wages fell 8 cents and they accounted for 230k of the 308k job growth. Leisure & hospitality wages NSA fell 4 cents; and NSA avg hours worked fell 0.3. Something is obviously wrong. Healthcare contributed 36k jobs, leisure & hospitality 28k, retail 47k, government created 31k and the phantom jobs estimated to be created by small business was 153k! This is now known as the business birth/death rate. Apparently a large number of workers entered the workforce in order to force the unemployed rate higher, but still something seemed incredibly wrong.

After the close, our good friend and astute, no nonsense economist, ex-Fed official and investment adviser (at Van Hoisington Management), Lacy Hunt, provided the answers to the conundrum. Of the 308k jobs created, 296k are temporary or part-time jobs! Let us repeat and letís be very clear, almost all jobs created in what is heralded as a great employment report are part-time jobs. "In March, the number of persons who worked part time for economic reasons increased to 4.7 million, about the same level as in January. These individuals indicated that they would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs. ĎPeople want full-time but canít find it.í Lacy opines that Congress did not renew unemployment benefits so many people took whatever they could get. This accounts for the surge in people entering the workforce. http://www.bls.gov/news.release/empsit.t05.htm Lacy noticed other salient points in the report. The average weekly paycheck in February for the private sector was $524.58; in March it fell an astounding 88 cents to $523.70. The area of job growth shows even worse numbers. The average weekly paycheck for leisure & hospitality workers is $225.55. Retail is $364.50. Now everything fits and conforms.."


I think a borrow-and-spend (not invest) global reflation recovery is underway. The artificial low interest rates and broad expansion in credit to any and all comers with nothing down has created bubbles everywhere. This past year all markets and bond markets went up. Usually stock and bond markets go in opposite directions except when central banks conspire to keep the entire yield curve low.

Because debt worldwide has continued to grow at a much faster rate than the nominal economic growth, debt exhaustion, at some point, will shut down consumer spending and start to reverse the "wealth creation" we have created out of debt consumption being poured into our housing stock. The best scenario will be "stagflation" which is generally good for distributors that donít have a lot of variable rate debt.

Right now those distribution channel with a lot of inflation Ė all metal intensive products, lumber, energy-intensive products either in the making of (e.g. paper) or the delivery of (bulky commodities) Ė are getting a big pricing, margin dollar and inventory valuation lift. The key is to see and manage these short-term positives in the context of a full, boom-bust, speculative buying cycle as we had in Ď74-75.

Donít let the Fog of Re-elections and political management of the global economy keep you from seeing past the November elections.

For one more, short, compelling economic read that focuses on our Governmentís need to borrow $300B from June to December of this year versus only $75B in this second quarter, check out: "The Financial Markets are Leveraged for a Crash" at this link: http://www.gold-eagle.com/editorials_04/benson040104.html.


In this past week I noticed business news on the three companies in the topic title with the common theme of selling off subsidiaries in order to get back to reviving a fading core business. Because 90%+ of all distributors are averaging an ROI that is not sufficient for long-term survival (article 2.14), I keep wondering when more distributors are going to start using the lens of customer profitability reports to do the same as the three be-titled companies.

The average firm has plenty of dead products, losing customers and even a few employees whose pay exceeds their net contribution to the team effort. If you ever get tired of working hard to have declining future employment prospects or frustrated that the company just canít seem to change in any significant way, you might check out the following references:


An annual quality ratings survey for airlines was released on Monday (4-5) which had Jet Blue in the #1 spot. This three-year old company which is based out New York's JFK International Airport has focused like a laser on giving frequent, value-conscious business travelers what they want: leather seats, seatback TVs with DirecTV programs, a stylish, big-city image and lots more. Here are some article out-takes:

"The low-cost carriers have continued to improve their performances. It's a different world today,'' said Kevin Mitchell, chairman of the Business Travel Coalition, a national organization of corporate travel planners.

Low-fare airlines used to have old equipment, but their growing market share -- from 4 percent in 1991 to 25 percent today -- has enabled them to buy new airplanes and spiff up service, Mitchell said.

The low-fare carriers, he said, have fielded increasingly confident, well- trained and highly motivated staffs, which helps lift their customer satisfaction numbers.

David Stempler, president of the Air Travelers Association, said the latest study results have tracked a shift in consumer preference, although the shift away from traditional carriers is far from complete.

The main influences on air passenger behavior, Stempler said, are "price, schedule convenience (both time of day and destinations) and frequent-flier relationships, with miles as the tie-breaker.''

Large-scale carriers still have advantages over low-cost competitors, thanks to their established frequent-flier programs and global networks, he said.

Nevertheless, Stempler said, "JetBlue has managed to capture the holy grail of aviation: low fares and high service. It used to be that low fares and minimal service went together.''

What are the parallels from what is going on in the flying business to distribution channels? Do you think distributors that grew too fast in the late Ď90s through acquisition are distracted like the big airlines, most of which are bankrupt or slowly heading that way? Is it possible for small distributors to embrace "high performance service management" practices and out hustle the big chains in their local markets? I think so. But, the big boys could adopt the same practices on a decentralized, branch-level basis if they could give up their top-down, financial management, one strategy fits all local markets practice.

Hereís the link to the airline quality survey article: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2004/04/06/BUGG560UT81.DTL.


For all of you executives who donít pay the most to get the most to expect even more out of your front line service workers, I have a must-read article for you which I canít link you to. The article is in the 4-12 issue of Business Week on pages 76 Ė77 and is entitled: "The Costco Way; Higher Wages mean higher profits (than Samís Club and BJís). But try telling Wall Street.

Here are highlights of the article:

  • Costco pays total compensation per hourly employee per year of about $39,005 versus Wal-Martís $27,287 or 43% more. And, significantly more Costco employees participate in its more generous health and retirement plans. But, Costcoís total employee costs as a percent of sales are lower than Samís Club or BJís, because their employee turnover is 30% of Samís (6% vs. 21%). Sales per square foot is 54% higher (Costco $795; Samís $516; and BJís $411). And, profits per employee are 24% higher (Costco $13,647, Samís $11,039)
  • Costcoís more productive and innovative employees have created a better total value proposition for more and better targeted customer niches.

Whatís the bigger question that this article poses? Which model of competition will predominate in the US?

  • Hire them cheap, work them hard, have mediocre, one-size fits all service and hope sales rep charm will get last look to meet the price from dumber, more desperate competitors that are selling naked commodities for a price.
  • Or, pay more to get more and to keep them longer, so that all employees can be educated and motivated to be part of the total team solution to deliver different total product/service solutions to each targeted customer niche.

The cheaper-labor model is simple, but it is short-sighted. It actually, in the longer run, is more expensive than the high wage-high value creation model. The latter delivers higher shareholder returns, higher growth with faster pay for suppliers, higher taxes for the government, and higher standards of living and job satisfaction for the employees.

For more on this pay more to get more, check out our article # 5.2 "Pay 150% to get 200% Output" and many of the other "people management" articles in section 5 5_2.asp. Our video-based training program, "High Performance Distribution Ideas for All" is the total educational, transformational solution for moving to the winning labor model. There is lots of information on this educational product behind the links in the center of our home page. Buy it through a re-seller (or become a re-seller) for peanuts, and itís guaranteed for 30 days. The big cost will be your time, the payoff, as Costco illustrates, is huge. Costco is getting those numbers against the toughest competitor on the planet in the toughest cost/price game in the world. Imagine what you might do against your local competition.


When you read through the commentaries above that star Jet Blue and Costco and what they are doing with "high performance service" practices combined with very focused customer niche service value creation strategies, does it make you a bit envious? These are companies in which both top-down and bottom-up improvement ideas emerge and get done with a can-do spirit.

I hear two different sets of stories from CEOís and middle managers through my speaking/teaching and DCC related email. CEOís lament that they can not find and keep good employees who will show enough initiative or take on enough responsibility to make any significant good changes to happen. And, middle managers wish that their boss was taking the course or reading the commentaries, because they feel hemmed in by having to make the quarterly numbers by doing the same old, top down, dysfunctional, financial-management and product pushing tactics.

My guess is that the 90%+ of all companies that arenít high performers may have up to 20% of their employee roster who could be an immediate part of the intrapreneurial solution to create new service value or cost reduction effectiveness (not pennywise, pound-foolish efficiency). But, the company must first adopt new ways of looking at and measuring their businesses that will work wonders for mature industries populated with too much competitive capacity in which 90% of the sales volume is on equally, excessively excellent commodity products.

I have already offered plenty of additional references to help CEOís rethink their businesses, so here is some advice for the middle managers out there who have discovered these commentaries.


First, a big question: how can we re-frame all of the ideas that we have been covering in the DCCs in a way that will allow you to make a difference?

1. Letís start by looking at one key model that I touch on in annotated slide. At my site, under "slideshows", if you would please click on show #2 and go to slide #2 in that show, you should find a slide with a title of " Productivity Levels". Hereís the link to the slideshow, you might print it out: Good_to_Great_Distribution_Results.pdf.

After trying to make some sense out of the slideís notes, here is more explanation. All of you are personally at least a "unit", you may even have power at the "departmental level", because you are the "manager or supervisor". At both of those levels you can always be looking for new: "efficiency, effectiveness and/or transformation" (hope my definitions for these three terms at the bottom of the slide suffices.)

The slide notes suggest that if we can use the mental models that are covered in the DCCs, other merrifield.com documents or the "High PerformanceÖ" video to at least guesstimate as to which customers (or internal ones for those in big integrated companies) are most profitable (or politically important to our corporate futures), this can guide our local initiatives.

But, why? Whatís in it for us? What can one person, one department, one branch do for the entire company? The "futility of individual action": wonít our little improvement gains be diluted by overwhelming corporate mediocrity? Wonít some politically-oriented superior take all of the credit for anything we do well to the upside and yet blame us for anything that might not work? How can we afford to fail forward, making lots of cheap, fast, learning mistakes when the costs will be spotlighted in this quarterís numbers? Isnít it best to just do what you are told and hang on to your job?

Here are some reasons for the pursuit of local excellence in no particular order (please add to the list!):

  • It might become contagious and spread down the processes that weave through our department.
  • It might get noticed and rewarded (donít assume that all good will be 100% stolen and not appreciated even by those who take the lionís share of the credit).
  • It might help us to learn how to learn on the job and prepare both our resume and us for better employment opportunities down the road.
  • It might increase our credibility and negotiation power which is often proportional to our track record performance and our next best job opportunity if it should get to a "take it or leave" situation.
  • Solving old and new problems creatively can be fun and what else do we have to do besides watching the clock or wishing our life away by counting the years until retirement. Wonít we at least learn how to do our best better?

So, with that pep talk behind us and the "productivity levels" slide in front of us, here are some additional readings that might help you to be part of the change for the better opportunities at the local levels.

2. When you look for ways to improve at the individual, departmental and perhaps the inter-department and inter-division/process level, you might consider sharing and practicing the guidelines that make up "Appreciative Inquiry"(AI). For more on this, print out this exhibit at my site: ./exhibits/Appreciative_Inquiry_Exhibit.pdf.

3. "AI" should lead you and others in your area to the most positive-energy opportunities, then you might all try to follow the guidelines for effective "dialogue" as you discuss "how we might change things, but might not; we are just looking for options and comfort-zoning". For notes on Dialogue that you can read and share with others print out this exhibit at my site: ./exhibits/Dialogue_Exhibit.pdf.

4. To get across the spirit of "learning-how-to-learn" to others, you are welcome to print out, read and share these readings/exercises that I developed in the mid-80ís for a company that I was turning around at the time. (We also made audiotapes for those who didnít read so well.) Three of my 20 or so "culturegrams" are at this exhibit link: ./exhibits/Culturegram_LearningtoLearn.pdf.

5. And, lastly as you come up with ideas for improvements that might improve local conditions and help the functional parts of your corporate strategy, you will want to "push the wheel of learning" and "make good mistakes". These two models are #ed 5.1 and 5.3 in "Chapter One" which you read in your first assignment. For a quick review and printout you can go to this new exhibit (#24) at my site. ./exhibits/Make_Lots_of_Good_Cheap_Mistakes.pdf.

As you skim through these references, I think you will all realize that to some degree you all do take risks and do things differently than you are told to do to take care of the customer, etc. In the spirit of Milo Minderbinder in novel Catch 22, or the characters in M.A.S.H who skirted all kinds of regulations to save lives and maintain their won sanity, see if you canít push out the limits of your own self-permission to make good things happen in spite of corporate constraints. So be it!


I have a number of close friends who happen to have high school seniors this year who are hoping the right fat envelopes will arrive next week from the right college admissions offices. What do you say to a child who might be disappointed? You know the old truisms about business: the A students are professionals who work for the B students who are top managers who work for the C student (total promoter) who owns the company. Or, think of Dr. Mel Levineís foundation here in Chapel Hill which is named "All Kinds of Minds" which is meant to connote that the job world requires lots more than the types of minds that do well in schools.

At any rate, just in case you might need it, here is a link to an article that underscores Dr. Levineís point: It is entitled: "Stressed for Success?" It is by David Brooks and it was published on the op-ed page of the New York Times on 3-30.


Hereís a link to an upbeat, short, New York Times, op-ed article that was printed on 4-3. http://www.nytimes.com/2004/04/03/opinion/03BROO.html?n=Top%2fOpinion%2fEditorials%20and%20Op%2dEd%2fOp%2dEd%2fColumnists&pagewanted=print&position=.

As you read through it, if you are a manufacturer that is shipping too many small orders all over the country or a distributor that doesnít have state-of-the-art scanning capability, then you both need to partner with a new emerging breed of master wholesaler/third party logistics partner. These firms have: the right location, the right technology with which you can interface, and the right hub economics for a given channel. These types of channel partners can now, more than ever, lower both manufacturers total sales service costs and distributors total procurement cost. More on this in the future.

Thatís all for this week!