April 21, 2004: Distribution Channel Commentary (DCC) # 67

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THIS WEEK’S TOPICS

  1. TECHNICAL GREMLINS AND BREAKTHROUGH VALUES.
  2. TIGER’S DRIVING PROBLEM AND OUR FILL-RATE STRATEGY.
  3. NOTES ON THE EXPANDING ROLE OF MASTER WHOLESALE DISTRIBUTION.
  4. "SOCCERIZING" YOUR DISTRIBUTION TEAM’S DAILY PERFORMANCE.
  5. HIGH PERFORMANCE DISTRIBUTION CASE STUDIES: FOODSERVICE & BIKES.
  6. IS YOUR FIRM ‘PASSIVE-AGGRESSIVE’ AND INCAPABLE OF CHANGE?
  7. MUST GET BOOK ON "CUSTOMER PROFITABILITY" BY BRENT GROVER.
  1. TECHNICAL GREMLINS AND BREAKTHROUGH VALUES.

Gremlin #1: Readers of last week’s DCC may have noticed a reference to topic #7 when there were only four! I had emailed a progress document to my assistant with 4 topics, then a final one with 7 that didn’t get through. So, she edited the first document and sent out an abbreviated DCC. Topics 5 –7 this week where intended to go out last week!

Gremlin #2: Some of you received last week’s DCC via email several days late. New DCC’s are typically posted on Wednesday afternoon, and then our email list is served after that with some often going out on Thursday AM. This past week we were busted by our cable company. They put a 1000-mailing-per-day limit on our outbound mail without notice. We ultimately found out that this is a method for their nailing at home offices for a monthly commercial rate. We now pay more, so you should receive your weekly commentary on a timely basis.

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    2.    TIGER’S DRIVING PROBLEM AND OUR FILL-RATE STRATEGY.

After chewing up the pro golf circuit for the last few years, Tiger Woods has slipped back to becoming one of the top ten. What happened? Is he burnt out; too rich too fast; distracted by his Swedish bombshell fiancée; bothered by a recent split from his former coach? There are lots of theories, but the data suggests that:

  • Other pros on the tour have upgraded the technology of their driving clubs to close Tiger’s driving distance edge, while Tiger has stayed with his 5+-year old driver solution; and
  • Tiger’s accuracy on his drives has slipped all the way to 117th as he has tried harder to drive even further. So, now he isn’t 20 to 30 yards further down the fairway than the others with a shorter shot at the green. He’s in the rough or behind a tree, so
  • He has fallen to 50th on accuracy to the green.

How does this apply to a distributor’s goal of having:

  • the highest competitive, local fill-rates?
  • a best one-stop-shop breadth of items (and suppliers) for a target niche of customers?
  • the lowest possible average inventory investment?

The longer the time between re-ordering from a given supplier (drive distance), the more off our forecasts become by a geometric degree for the demand for each line item during the re-order period (deviation from the center of the fairway).

Consider two extreme scenarios: we can place and receive weekly orders from one supplier; OR another supplier will get quarterly orders in order to make minimum order size, avoid punishing freight or handling charges per case and/or get the truckload, lowest price to maximize margin percent.

Our forecast for each item’s "demand during lead time" for the one week cycle period will be very accurate, and slight overage or underages can be quickly re-tuned or compensated for in the following week’s order. But, our accuracy for the three-month order cycles will deviate geometrically. Deviations will average plus or minus 40% at the item demand level. (Master distribution centers that replenishment many small locations can do better, because lumpy local demands can be averaged out to some degree.) The over stocked items will quietly increase our average inventory investment and holding costs. But, what should we do about the items that are stocked out for 40% of the order cycle? We can scramble to save a lot of the potentially lost sales by:

  • Substituting other competitive brands or more expensive items from the same line at the less expensive item price. (Does inside sales switch the demand for the substituted item to the economy one? Otherwise, we will continue to buy more expensive items to keep substituting in for the less expensive one that our customer base actually wants.)
  • Buying the stocked-out item as needed from a competitor, another location or a master distributor.
  • Persuade the customer to go with a backorder and put up with our weak service until they quietly switch their business to someone else with superior fill-rates; etc.

The hidden costs for all of these scramble moves will more than wipe out the price savings we thought we were achieving by buying big on an infrequent basis. What should Tiger do? What should we do?

Tiger might switch to the latest driver technology or stop swinging so hard. Instead of muscling a sports motion like pitching, tennis serving or golf driving, a seven-eighths, graceful-motion effort will give up a little power or distance for a lot more accuracy and total effectiveness. For more on his problem, check out this article link: http://www.sltrib.com/2004/Apr/04192004/sports/158675.asp.

For the diehard golfers, here is a more statistically detailed analysis of Tiger’s positive tradeoff opportunity that appeared in a 4-14 article in the Wall Street Journal entitled: "What the Duffers Can Teach Tiger Woods" by a b-school professor named Paul S. Kedrosky. I can not give the WSJ online subscribers a link, but you can search the entire article out. For the rest, here is an excerpt:


"Tiger Woods's game centers on his booming drives. His ability to hit long shots -- off the tee in particular -- that fairly consistently find the fairway strikes awe in other golfers, and makes short work of even the longest par fives.

He conceded as much in a 2002 interview: "The driver has the special capability of giving me an emotional lift and a big edge psychologically."

But this year Mr. Woods's drives have become more of a liability than an asset. His cannon shots off the tee generally find fewer fairways, making golf galleries everywhere much more nervous -- while emboldening his competitors.

While the average length of Mr. Woods's drives has varied from season to season, PGA data show that his average drive length has increased almost 10 yards in the past five years, to 302 yards from 293 yards. While all golfers have become longer hitters in recent years, Mr. Woods has somehow remained ahead and among the five or six longest drivers in the game.

Nevertheless, every Saturday-morning duffer knows that the farther you hit the ball, the less likely it is to find the fairway. Could the same distance-accuracy tradeoff hold for pros like Tiger Woods?

Well, it is easy to check. There are 186 professional golfers on the PGA tour for whom 2004 data are available. If you plot driving accuracy against driving distance you see something that will come as no surprise to golf amateurs (or golf geometers for that matter): The farther you hit the ball, the better chance a slightly off-angle club face will cause a mildly off-target shot to become awful. Driving accuracy, in other words, declines with distance (with a correlation of -0.5) for pros just as it does for amateurs.

Despite his decline in driving accuracy Mr. Woods remains among the most accurate drivers on the professional circuit -- of the small group, that is, that consistently hits the ball 300 yards or more. In other words, he remains a better driver than most; it's just that that translates into a measly 61% driving accuracy.

In Mr. Woods's case, that matters. His drives are the key to his game: Errant drives not only mean lost shots in pitching out from under some shady tree; they also mean a reduction in his "edge." His poor drives are almost certainly making him a marginally less confident and able player all around.

There is, however, an easy solution -- one that doesn't require dropping the Swedish fiancée, or removing ex-coach Butch Harmon from the deep freeze. I have four words of advice for Tiger -- something my father first told me -- that will be familiar to all the hackers out there: "Stop swinging so hard!" A little less distance would go a long way."

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What can distributors do about supplier line buys that arrive every 2 to 3 months? They can switch the volume to consolidated orders that arrive weekly from:

  • Master wholesale distributors
  • Coop owned master distribution centers. Examples: many members of Ace, DoItBest and Johnstone Supply have generally figured out the benefits of buying fill-rates first, turn-earn economics second and lowest price direct from many more suppliers third.
  • Supplier roll-up firms that have put in effective master distribution centers through which they run all of their different factories volume.
  • Master distribution centers owned by a consortium of suppliers

For more on the positive trade-off economics of paying higher prices to a master distribution center than buying direct from suppliers at a lower price, but far less frequently, see the next topic. And, for aging athletes remember to stop trying to hit it like the young guys; trade-off power for accuracy and consistency.

    3.    NOTES ON THE EXPANDING ROLE OF MASTER WHOLESALE DISTRIBUTION.

Because tough economic times are the mother of necessity, a lot of manufacturers are finally getting wise to distributor profitability measurement as well as outsourcing non-core competencies like warehousing and shipping.

Here are some customer profitability stories that I have recently run into. One manufacturer discovered that its biggest losing accounts were big distribution chains with big annual aggregate purchases that were made up of too many small orders being shipped directly to every branch. The chain had received truckload pricing with no minimum-sized order deal from the sales department that was focused and paid on total cases sold (not customer profitability), but the warehouse/shipping department was getting killed on small order costs.

A division of Kimberly Clark recently sent out a new value-added pricing schedule for their channel customers in which they had increased charges for every incremental activity beyond shipping straight truckloads of non-assorted skids (one item/skid). This schedule skewed the difference for the average landed cost per case of product between the best possible price and the LTL assorted cases to one location dramatically. We could phrase this pricing change several ways:

  • Kimberly Clark has gone to activity-based or value-based pricing.
  • They have created functional discounts for master distribution centers whether they be: independent; captive hubs for spokes within distribution chains; or, coop/member owned.
  • They have applied channel rationalizing pricing which will cause the disappearance of many formerly direct buying distributors/dealers/stores/branches that will now buy through break-bulk distribution centers.

A large manufacturer with several divisions that all sell through a common distribution channel discovered that:

  • They had too many small customers for which the total cost of selling, maintaining and servicing, on an annual basis, caused these small distributors to be losers.
  • None of their factories were doing warehousing and outbound logistics well let alone at some world-class level.
  • There were many more small, niche distributors that could buy their products, but weren’t.
  • The independent, customer-niche focused distributors were now growing organically faster than the big consolidated roll-up distribution chains, and they are still selling new products instead of being low-cost fulfillment, private-label sourcing and substitution players.

So, they approached a master distributor and asked if they could:

  • Create rationalization, cost-plus pricing (like Kimberly Clark’s) that would allow three different groups of small, customers to buy at the old price as long as they combined their needs with the rest of the volume that they were already buying from the master distributor. The two parties have to work on separate plans for: distributors that are already buying from both the master wholesaler and the manufacturer. Distributors that are buying from the manufacturer, but not the master wholesaler. And, distributors that are buying from the master wholesaler, but not the supplier.
  • Consider being a third-party logistics (3PL) solution for all of their outbound goods. The divisional factories would ship (on a one at a time, experimental basis) all of their volume to the master distributors warehouses. The "3PL subsidiary" of the master distributor would then ship to all of the factories "direct end-users" as well as to and through all channel distributors.
  • The first "factory" to ship to the master distribution center is actually in China, so containers would arrive directly to the master distributor’s warehouse for superior recombination economics than to a 3PL warehouse that deals with all kinds of random imported products for all kinds of different channels.

So, producers of goods are starting to realize that master distribution centers can:

  • Lower their annual, total sales and service costs (TSSC), especially for small-location distributors, which includes big chains with direct buying branches, and convert profit losers into winners.
  • Increase the number of distributors/dealers that can buy their products more easily.
  • Take over 3PL needs for imported containers of goods and do a better total economic job for all parties involved than a 3PL provider that has no specific channel customer focus.
  • Potentially take over 100% of the outbound production for domestic factories, especially if most of it is going to and through the distributors that the master distributor serves.
  • Increase the comparative fill-rate performance of their products off of the distributor/dealer’s shelf in comparison to the me-too competitors’ stocked items. Because distributors can get weekly shipments that include a given manufacturer’s products, fill- ates can be managed to much higher levels as we saw in topic #2 above. Then, the supplier’s items will be substituted more often for the competition’s items that stock out more often, because they are bought "direct" every two to three months. The item will then gain market share because of this service edge.

What do the distributors get from the master distributor that carries the broadest one-stop-shop assortment of items with the highest fill-rates?

  • A lower "total procurement cost" at a higher price than if they bought each supplier line direct.
  • Significantly higher, everyday fill-rates than the distribution competitor that continues to buy direct from all suppliers, especially the ones that have two to three month order cycles. This will include commodity volume suppliers that go with a Kimberly Clark type pricing scheme that will force distributors to order 2 to 6 times per year to make truckload volume.
  • The ability to create a more robust breadth of one-stop-shopping items for a given target niche of customers without having to add lots of additional suppliers, small average purchase orders and small in-bound, expensive freight shipments.

Beyond the benefits of using master distribution centers listed above, there are "next level" efficiencies that can be achieved at the interfaces between the master distributor and both suppliers and distributor/dealers. But, first the majority of both manufacturers and distributors have to understand the first level of total economics and the trade-offs therein of why master distributors exist.

  1. "SOCCERIZING" YOUR DISTRIBUTION TEAM’S DAILY PERFORMANCE.

For those of you who missed last week’s commentary (DCC # 66), there were a number of quotes from Anson Dorrance, the UNC Woman’s Soccer Team coach who has won 17 of the last 21 NCAA tournaments with many undefeated teams. A reader (and "High Performance. . ." training system user) called about how to adapt Dorrance’s methods of measuring lots of performance factors in everyday practices ("competitive cauldron" in DCC 66.4). 66commentary.asp.

We discussed going through the following steps (web site and video module references are included):

All modules in section 4 of the video are about the "perfect service reinvention" how to’s.

  • Then, re-think all of the service processes that thread through different departments to guide the re-education, re-training and re-motivation of the employees who must make it happen. ./exhibits/processx.asp and video modules #ed 5.10 and 11.
  • Post the "big 8" of service excellence plus all heroic acts for target accounts and heroic recoveries for all customers.
  • Start pushing the wheel of learning to achieve continuous, sustainable, measurable service improvement. ./exhibits/Make_Lots_of_Good_Cheap_Mistakes.pdf.

The comparative ranking reports from highest, best individual achievers to lowest and between process teams at multiple locations can be eased into with the stated objectives being to learn from the best to upgrade the rest, so we can all share in higher wages and/or gainsharing bonuses. (Video modules 5.3 to 5.5)

During this entire transition process, employees can get over-focused on the ratio of "annual gross margin $s/ employee", and managers can get over-focused on operating profit/customer. These are both good "north star" guiding metrics (2_16.asp), but the reasons that these metrics will improve are because the service metrics for a target niche are improving in addition to management pursuing a number of "customer profitability ranking report" plays. The seven plays are listed in slides #ed 7 and 8 in this annotated slide show: Identify_Customer_Niches.pdf.

Most distributors have wonderful ERP information systems that are woefully under-utilized. Most of these systems can do simple, but sufficient customer profitability ranking reports. Most of the software solution providers have "business intelligence" packages that can be re-deployed to soccerize your service performance efforts. Executives just have to believe that they can and must create distinctive service advantage offerings everyday to succeed. Selling commodity products for promotional discounts or getting last-look at your best accounts to match prices offered by desperate, dumb competitors isn’t going to regain or recreate profit power. Distributors have too much data which isn’t being used correctly to measure, improve and sell service value to the right customers in one target customer niche at a time.

  1. HIGH PERFORMANCE DISTRIBUTION CASE STUDIES: FOODSERVICE & BIKES.

Plenty of trade magazines try to find and report on outstanding distribution performers. Thanks to the web, there are actually some super-star distributors who have shared their success stories with us on a direct basis. If you would like to check out two examples of distribution firms that execute the checklist of practices in topic 4, then check it out these fascinating company stories.

Labatt Foodservice Based in San Antonio, TX

This third-generation business was actually an $8MM spin out business of a now defunct wholesale grocery distribution firm that Blair Labatt, Jr. has guided to well past $350MM in sales over the past 20 years. Here is a link to their history: http://www.labattfood.com/introduction_to_labatt_food_serv.asp.

One of the most amazing peculiarities about Labatt is that they don’t sell private label brands in a channel in which all other distributors sell an enormous and growing percent of private label volume.

Here is a link to Labatt’s mission statement which reflects the commonwealth capitalist view that all four major stakeholders – employees, customers, suppliers and shareholders – must do well: http://www.labattfood.com/Mission%20Statement.htm.

And, Blair, as both a past president of several industry trade groups and a PHD in English (he taught English for awhile at the University of Texas in Austin before getting into the distribution business) has written some posted editorials. He has a very readable style of writing, so a link follows to one of his several posted columns. The chosen column touches on the power of having the right processes to serve a target niche of customers before you invest in information technology. Blair isn’t one to try to "pave over old cow paths" with "technology gadgetry". I hope that you like it enough to read his other three timeless pieces. Here’s the link: http://www.labattfood.com/making_businesses_processes_bett.htm.

Quality Bicycle Products; Bloomington, MN

How can one guy start up a distribution business in the depths of a severe recession (1981) to serve bicycle dealers that were then and still are being eaten alive by mass merchants to then grow to having over 200 employees today? And, it was all internally financed with high performance profitability. Steve Flagg, the CEO, generously shares his story at this link: http://www.qbp.com/company/history.html.

A big reason for Quality Bicycle’s success is the high performance culture that Steve has created. Read through the top 10 reasons employees like to work at QBP at this link and ask yourself what your employees might say to the same question: http://www.qbp.com/work/empsay.html.

Don’t the stories behind both Labatt Foodservice and Quality Bicycle make "high performance distribution management" sound more fun, profitable for all stakeholders and doable? Both companies have been able to be perpetual service value innovators, because all of their employees choose to be part of the solution instead of part of the problem.

If your company seems to have trouble changing for the better or perhaps fits the description in the article below, isn’t it time to start having your core management group "dialoguing" and emotionally comfort-zoning the possibility of "High Performance Ideas. . ." and practices?

    6.     IS YOUR FIRM ‘PASSIVE-AGGRESSIVE’ AND INCAPABLE OF CHANGE?

I know plenty of distributors that are gun-shy about trying any big-bang types of change. They have tried a lot of smaller changes in the past with very little success. I have heard plenty of CEOs tell me over the years something like: "I can’t do that. My sales reps (or branch managers) wouldn’t/couldn’t do that. I can’t get them to change their ways in any significant way."

Well, maybe your firm is "passive-aggressive" and resists change with a "yes sir", a smile and then just never getting around to it. More on this pattern is in this quick read from a recent business section article from USA Today. Here’s the link: http://www.usatoday.com/money/companies/management/2004-04-12-passive-aggressive-culture_x.htm.

How do you solve it? Instead of sounding like a nag, I’ll let you guess about a training product you might buy.

   7.     THE BOOK ON "CUSTOMER PROFITABILITY" FOR DISTRIBUTORS IS HERE!

The only book on how to measure customer profitability that is totally oriented toward wholesale distributors is now in print. The title is: MORE TO THE BOTTOM LINE by Brent Grover. You can find out more about it at this link: http://www.nawpubs.org/cgi-bin/CatalogMgr.pl?cartID=b-3873&SearchField=partnumber&SearchFor=946&template=Htx/book.htx&ftrFile=../htdocs/946.htm.

The price may seem to be a total rip-off compared to general business press books, but because it is totally tuned to a distributors needs it is value priced and worth it. But, you have to want to actually look at your business in a revolutionary way and read it, collecting unread books by specialty publishers is a particularly poor return on your investment.

Brent’s book goes several levels deeper than my quick-and-dirty customer profitability ranking method, and is equally or more supportive of the 7 plays that you can execute once you have new wisdom and direction from customer profitability analysis. Those plays were referenced in topic 4 above, but again they are on slides #ed 7 and 8 in the annotated slide show at this link: Identify_Customer_Niches.pdf.

That’s all for this week!

Bruce@merrifield.com

919/933-7474