April 14, 2004: Distribution Channel Commentary (DCC) # 66

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THIS WEEK’S TOPICS

  1. THEMATIC QUOTES FOR THIS WEEK’S COMMENTS.
  2. UPDATE ON PRODUCT LINE INFLATION AND INTEREST RATE INCREASES.
  3. US SERVICE QUALITY FADES; THE OPPORTUNITY? THE SOLUTION?
  4. DEAN SMITH, ANSON DORRANCE PRACTICE TIPS FOR SERVICE EXCELLENCE.
    1.    THEMATIC QUOTES FOR THIS WEEK’S COMMENTS.

For the past 10 years we have watched the women's soccer team of The University of North Carolina (Tar Heels) excel, and the thing that stands out the most is how fragile it all is. Somehow the coaches and players have kept this program balanced on the high wire for decades. The use of the word ‘dynasty’ to describe it is completely misleading. A dynasty involves people born to a station who hold their position whether they deserve it or not. In total contrast, this program earns its position every game. Nothing is given. There is no birthright, only attitude and effort. The games all start even. Past successes guarantees nothing (other than getting your opponents’ absolute best shot). The fall from the high wire could come at any moment. I can tell you this, if we thought there was some kind of guarantee it would be a lot less interesting to watch.

". . . coaching development ceases to be about finding new ways to organize practice and collecting drills and shifts to observing how the great ones motivate, lead or drive players to performances at higher and higher levels. Your strength in coaching is having the courage to constantly deal with athletes that unconsciously try to take things a bit easier." Anson Dorrance, UNC Women's Soccer Team Coach since 1979.

"The true joy in life is to be a force of fortune instead of a feverish, selfish little clod of ailments and grievances complaining that the world will not devote itself to making you happy."   George Bernard Shaw, Irish born playwright 1856-1950.        ("We don’t whine." Anson Dorrance)

"The difference between one person and another, between the weak and the powerful, the great and the insignificant, is energy – invisible determination…This quality will do anything that has to be done in the world, and no talents, no circumstances, no opportunities will make you a great person without it." Sir Thomas Fowell Buxton, 1786-1845, British abolitionist, reformer and philanthropist.        ("We work hard. Our fitness standard was set by John Havelicek, the relentless Boston Celtic forward of the ‘70’s. When asked, ‘why do you run so hard?’ He said: ‘a doctor told me that the body will protect itself, it is designed to pass out before you die.’ " Anson Dorrance)

"Three of every 10 people in the USA work for a passive-aggressive company. By definition, these are congenial, conflict-free companies where nothing changes." Del Jones, writer for USA TODAY from an article entitled: ‘When you're smiling, are you seething inside?’(more in topic #7 below)

    2.    UPDATE ON PRODUCT LINE INFLATION AND INTEREST RATE INCREASES.

In the early ‘70’s distributors experienced the following sequence of events:

  • Product line inflation accelerated and remained high causing most to eventually switch to LIFO accounting to avoid paying taxes on inventory profit gains.
  • False shortages of products occurred which in turn spurred forward-buying, hoarding and price increase speculation which became a virtuous cycle for profitability on the way up and a vicious cycle of un-profitability on the way down
  • Interest rates on short-term working capital loans climbed steadily up to 20%+ in January ’81

Well, the pattern appears to be starting up again. Readers are welcome to go back to DCC #60 and skim forward on my views and references for why inflation is taking off in the US and around the world in spite of what airbrushed, rear-view-mirror, data from most governments is claiming. How distributors anticipate inflation, forward-buying/stockpiling in their channel and short term interest rate increases, especially if they have a lot of short-term, variable debt, will be critical over the next six+ months.

One key area to watch is the commodity demand and inflation being caused by China’s runaway growth. China’s growing demand has pushed up world wide prices for all metals, oil, shipping rates, construction materials, farm products, etc. A growth accident or a bust of the speculative, debt-financed, forward-buying of commodities in China might cause a temporary (?) drop in commodity prices.

Here are some observations from the past week’s news:

a) "The Chinese economy, as a producer, and the American economy, as a consumer, have emerged as the two main engines of the global economy, but China's ability to sustain its breakneck pace of economic growth is increasingly in doubt", said Sung W. Sohn, an executive vice president of Wells Fargo.

"There's a greater probability the Chinese engine might stall, and that represents the greatest threat to the global economy," according to Mr. Sohn.

The corporate goods price index of the People's Bank of China jumped 8.3 percent last month compared with March 2003. The index measures prices that companies pay for goods from other companies, and covers transactions at many levels of the economy, from the iron ore that mines sell to steel mills to the washing machines that appliance manufacturers sell to distributors and retailers.

The rise in March represents a swift acceleration in an important measure of inflation. The year-over-year change was less than 1 percent as recently as June, and the index was actually falling in 2002.

In an announcement on its Internet site on Sunday night, the central bank, the People's Bank of China, said that effective April 25, it was increasing the amount of money that most banks have to keep as reserves to 7.5 percent of their assets, up from 7 percent. Poorly capitalized banks will have to keep reserves equal to 8 percent of assets, up from 7.5 percent.

When the central bank raised reserve requirements to 7 percent from 6 percent last August, it gave banks a full month to adjust to the decision. The decision to push through an increase now in just two weeks suggests a sense of urgency among Chinese central bankers.

Why the sudden effort to tighten lending in China? The action accompanied the release of figures late Sunday showing that China ran a trade deficit in March for the third month in a row. The deficit, though modest at $540 million, makes it more likely that China will continue resisting pressure from the United States, Europe and Japan to let its currency rise, even as Vice President Dick Cheney visits Beijing on Tuesday, economists said.

The official New China News Agency reported on Sunday that China's State Council, as the cabinet is called, called for strict curbs on new construction after a meeting on Friday led by Wen Jiabao, China's prime minister. Mr. Wen recently warned publicly that bringing the Chinese economy under control this year would be even harder than last year's fight against SARS.

The State Council concluded that while rapid economic growth had yielded benefits for many Chinese, there were "some serious problems during economic performance," including "overgrowth of investment, too many new construction projects, blind or overlapped construction efforts," the news agency said. "The overheating problems in some sectors have imposed pressure on coal, power, oil and transport supplies and resultingly brought about rises in prices for raw materials and other necessities, according to the meeting."

Investment spending has been rising at nearly three times the rate of overall economic growth lately, while consumer spending has lagged, raising fears that China may be erecting new factories and apartment buildings faster than they can be put to use.

Independent economists said that the Chinese government's actions were late and probably inadequate to contain rampant speculation that is starting to feed inflation, including rising prices for some goods imported by the United States. They warned that China is facing a growing risk that its recent economic boom could be followed by a costly bust.

"The hard-landing scenario likelihood is rising fast," said Andy Xie, a Morgan Stanley economist here. "Something bad could happen in the next three to four quarters."

b) As for inflation in the US, here are a few factoids:

  • Prices of goods imported to the U.S. rose 0.9 percent in March, reflecting the drop in the value of the dollar and an increase in costs of oil and other raw materials, government figures showed. Sony Corp., for instance, recently raised the prices of lithium batteries by an average of 10%, after the cost of cobalt -- a metal used to make electrodes in the batteries -- soared to about $25 a pound from $7 a pound in 2002. Kumho Tire Co., a major tire producer in South Korea, has increased the prices of its export products between 3% and 5% since January amid a 70% rise in rubber prices in the last 18 months. Similarly, Samsung Electronics Co. decided early last month to mark up several of its products, including refrigerators and washing machines, because of the higher prices for steel and resin, a compound used to make molds and plastic parts.
  • Henry Willmore, the chief U.S. economist at Barclays Capital in New York says he believes the odds are "more than 50%" that Asia-inspired inflation will pick up noticeably in the U.S. in the next year. One reason, he says, is that the commodity price run-up has been broader -- and has lasted longer -- than most other commodity booms of recent decades. And unlike past commodity surges, the current spike "is largely out of control of U.S. policymakers," since the impetus for much of the inflation is in Asia.
  • The average U.S. price of hot-rolled coil steel -- which is sold to car makers and others -- hit $605 a ton this month (March), a 68 percent surge from December's low of $360, according to steel consulting firm Meps International. Prices for scrap, used in most steel making, have risen from $120 per ton last summer to $252 a ton this month, mainly because China is buying all it can find to feed its rapidly growing steel industry. The same is true for coke, the fuel used for blast furnaces. So far, the steel price increases haven't shown up on new car price tags and other items made by companies that are locked into lower prices thanks to long-term contracts. But those contracts are updated every year and the price spikes are bound to make their way to American consumers.
  • How about life on the farms? Corn was 1.93 in April 2002. Corn is now 3.30. Soybeans were 4.21 in December 2001 -- beans are now 10.16. Wheat was 2.79 in April 2003. Wheat is now 4.15. A domestic shortage has pushed soybean prices above $10 a bushel, twice the level of just seven months ago, and the effects already are being felt among food producers and at grocery-store cash registers. The retail price of a 32-ounce bottle of Crisco cooking oil is up 21% since November. Del Monte Foods Co. raised prices of its pet-food brands -- 9Lives and Kibbles 'n Bits -- by about 5% in January, following its rivals. The makers of some soy-based foods, such as soymilk and vegetable burgers, expect to raise their prices 5% to 10% this year. But it is the soybean situation that is causing the most consternation for the food industry. It is the commodity the country might actually run out of by late summer -- a development that would possibly idle some plants and force reformulations of some products.
  • How about energy? April 6 - Bloomberg (Alex Lawler): "The International Energy Agency, an adviser to 26 industrialized countries, raised its forecast for world oil consumption this year for the sixth straight month as the U.S. economy recovers and demand surges in China. "The IEA is finally getting closer to reality - they've been under-forecasting demand for a long time," said Gary Ross, chief executive of energy consultancy PIRA Energy Group. He added, however: "They are still below the mark." Indeed, traders said the market's strong price move had more to do with expectations that demand estimates would be revised higher again. "Every reporting agency continues to say, 'we've missed the mark on demand expectations,' " said Phil Flynn, senior market analyst at Alaron Trading in Chicago. "The speculators are betting on more revisions, and they have been right all along." Mr. Flynn and other industry analysts said they expected the price of crude to hit $40 a barrel.
  • How about paper and plastic which consume higher pulp and energy costs? Georgia-Pacific said this month it would boost the price of its toilet paper, tissue and paper towels 6% to 9%, and the price of Dixie cups, plates and plastic utensils 4% to 6%. In March, Kimberly-Clark said the price of Kleenex, as well as Cottonelle and Scott toilet paper and Viva paper towels, would jump 6%. In February, P&G said it would raise the price of Bounty towels and Charmin toilet paper 5% to 6%. All the moves are effective midsummer. The three companies make the lion's share of the toilet paper, paper towels and tissue in the U.S., and their decision to raise prices could mark a significant turning point for the pricing power of consumer-products makers. All the companies blame rising commodity costs, and say they have absorbed those increases long enough. Since December 2002, natural-gas prices are up 48% and wood pulp, used to make paper products, is up 21%, P&G says. Other commodity price increases are affecting these same companies; yesterday, P&G said it would raise the price of its Folger's coffee sold to the food-service industry 4% to 6% next month.
  • How about building material costs? Prices of both oriented-strand board (O.S.B.) and plywood reached records this week. According to Random Lengths, a trade publication in Eugene, OR, 1,000 square feet of 7/16 inch O.S.B. - 31 four-by-eight sheets - sell for $503 in the north central United States; this time last year, the price was $170. Half-inch four-ply southern pine plywood is up to $523 for 1,000 square feet, from $240 a year ago. Plywood prices began to rise last year in late May and early June, dropping late in the year, before increasing sharply in January. Prices of other types of lumber have also risen, though less sharply. And the buoyant metals markets, especially for steel, have also driven up home-building costs.
  • How about housing cost inflation? "The percentage of households in California able to afford a median-priced home stood at 24 percent in February, a 6 percentage-point decrease compared to the same period a year ago when the Index was at 30 percent, according to a report released on April 8th by the California Association of Realtors (CAR). CAR's monthly housing affordability index measures the percentage of households that can afford to purchase a median-priced home in California. The index is the most fundamental measure of housing well-being in the state. The minimum household income needed to purchase a median-priced home at $394,300 in California in February was $91,690, based on a typical 30-year, fixed-rate mortgage at 5.74 percent and assuming a 20 percent down payment. The minimum household income needed to purchase a median-priced home was up from $77,220 in February 2003, when the median price of a home was $326,640 and the prevailing interest rate was 5.93 percent."

I could go on, but you get the picture. Who are you going to trust, the government’s "no inflation" numbers or your own personal and company expenses?

Is there a housing bubble? I have no doubt. Here’s a link to this week’s article on why there is a bubble: http://www.businessweek.com/bwdaily/dnflash/apr2004/nf20040412_1506.htm.

What’s the government doing with a President and congress all up for re-election? Politics trumps responsible economic policy. Money supply is gushing. The entire interest rate yield curve has been engineered to artificially low levels to inflate bubbles all over the world. Deficit spending continues to grow, etc. The feeling better economic recovery may last all of the way to the elections, but plan on much higher inflation with interest rates to follow whether the Fed likes it or not.

And, we shouldn’t assume that we are suddenly smart again when big inflation hits our product lines and demand firms because more customers are doing more forward-buying, which will rob of us of future sales if and when the global commodity price bubble pops. More than ever, we need to run our businesses differently to run them better. Tinkering at the edges of our old business model and practices won’t cut it in the longer run.

    3.    US SERVICE QUALITY FADES; THE OPPORTUNITY? THE SOLUTION?

About once a month, I see an article that will take the measure of and lament the poor service levels in the US. The latest, best one that I saw was in the Washington Post. Here’s the link information: http://www.washingtonpost.com/wp-dyn/articles/A28784-2004Mar27.html.

For those skimming through, the gist is that from a number of perspective service levels, especially on complaints. ("heroic recovery opportunities; see the article of mine at this link: 3_5.asp) has been deteriorating across most industries since the early ‘90s. Why? Companies cut back on training during tough times, personnel turnover dilutes the knowledge, the intensity, the commitment; etc.

What’s the opportunity? Less than 5% of US service firms, IMO, are able to achieve and maintain high levels of service commitment and quality, so they grow 2 to 5 times faster than their industry growth rate making 4 to 6 times the ROI of the bottom 90% of the industry players. The superior financial numbers are happy by-products of service retention economics. The best firms retain the most desirable customers at a greater rate by driving fewer customers away through weak service than the competition drives to them.

The solution has its philosophical roots in the quotes you might re-read in topic one. Great service teams: don’t whine, work hard, create their service value and win their customer loyalty and margin premiums everyday.

A total, educational solution in a box for transforming your team from an agree-and-do-nothing firm into a high performance service value team is our video product: "High Performance Distribution Ideas for All". Read all about this guaranteed-satisfaction solution by hitting the links on the video in the middle of hour home page at www.merrifield.com.

    4.    DEAN SMITH, ANSON DORRANCE PRACTICE TIPS FOR SERVICE EXCELLENCE.

Just in case you know who Coaches Smith and Dorrance are, here’s the scoop. I live in Chapel Hill, NC the home of the University of North Carolina’s main campus which has had a rich top 10 NCAA basketball team tradition that goes way back. Dean Smith was the head basketball coach for the "Tar Heels" for 36 years from 1961 to 1997. Over those 36 years, he won an all-time collegiate record 879 wins. For 27 of those seasons, the Tar Heels won 20 or more games and won two national championships along the way.

Anson Dorrance has been the head coach of the UNC Women’s soccer team since 1980. He’s teams have won 17 of the last 21 NCAA championships. He recently gave a speech to the Chapel Hill rotary and shared some notes with us from which I have gleaned not only some of the quotes in topic #1, but the following comments:

"When I was a young coach he (Dean Smith) used to let me come watch his practices. They were a marvel of organization, efficiency and accountability. It seemed like everything was recorded by assistant managers scattered around the floor.

  • If a player hit or missed a shot
  • Boxed out well or failed to
  • Whether his team won the scrimmage or lost it

And at the end of practice when Coach Smith would gather the players for his final address all the assistant managers would sprint to the scorers table where the head manager would be sitting and he would compile that days practice statistics and rank performance for that day.

When Dean was finished speaking to the players he would turn around, the head manager would hand him the results for the day and the players with the best practice performance would be dismissed to go shower immediately and the rest would line up to begin a series of suicides based on where they ranked in that days session.

This is wonderful accountability; we adopted it, soccerized it and took it to a new level. We call it the "competitive caldron" and we track, record and post everything. So just working is not enough. Competing to get to the top of each "caldron" is the challenge and there are 24 of them.

7 athletic rankings
3 fitness components
5 1 versus 1 environments
8 technical ladders (trapping, passing, shooting, dribbling and heading)
1 win/loss/tie game composite

There is in addition a four year long range
athletic tracking record
a fitness evolution chart
and a technical improvement table

Because we fully understand that "you can't improve what you can't measure", we measure everything and might be the only soccer program in the world that does. We also understand that "people do what you inspect not what you expect" so we have three full battery athletic and fitness tests a year: the first day of training in the fall, one month into training in the winter and last day of training in the spring.

We want our athletes to live in a climate of "never ending ascensions" and want them to be accountable for everything they do while on this ascension and set high standards."

Do all of us need to apply these lessons to our companies? It is definitely some food for thought.

More next week.

Bruce

Bruce@merrifield.com

919/933-7474