September 15, 2004: Distribution Channel Commentary (DCC) # 70

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THIS WEEKíS TOPICS

  1. THE COMMENTARIES ARE BACK, SORT OF.
  2. INNURED TO TERRORISM AND OUR ELEPHANT PROBLEMS.
  3. OPTIMISM AND DOING MORE OF THE SAME ISNíT A STRATEGY.
  4. STILL NO PRICING POWER AND RISING HEALTH COSTS, SO..?
  5. "THE POWER OF IMPOSSIBLE THINKING" - WEAK TITLE, GREAT BOOK.
  1. THE COMMENTARIES ARE BACK, SORT OF.

(5:30 AM; Chapel Hill, NC) Iím trying to get rid of the dust and rust from not doing these commentaries since last June. Over the summer, we did publish and post some articles mostly dealing with the expanding space within distribution channels for master (re)distribution. If you donít believe what a big opportunity this space is for both traditional manufacturers and distributors, you might skim the articles that are posted at www.merrifield.com under the "articles" button and numbered: 2.21, 2.22, 2.23, 2.24, 2.25, 3.13 and 3.14.

As for the resumed pace of the commentaries, they will not be weekly, but surely I can be good for at least one or two a month. And if any of you in reader land send me emails of thanks, encouragement or you-must-be-crazy critiques or questions, you might even see an occasional gust of up to three per month. So, skim on to see if anything grabs you this week.

The theme for this week is "Mental Models" and thinking about how we think. Here are a few quotes to tee the topic up:

"One cannot solve a problem with the same kind of thinking that gave rise to that problem." Albert Einstein

"Our use of old words to describe new things can hide the emerging future from our eyes." Charles Handy

"In the old world, managers make products. In the new world, managers make sense of things."

John Seely Brown

"We are drowning in information but starved for knowledge." John Naisbitt

"All life is an experiment. The more experiments you make, the better." Ralph Waldo Emerson

"The world hates change, yet it is the only thing that has brought progress." C.F. Kettering

"The future enters into us, in order to transform us, long before it happens." Rainer Maria Rilke

    2.    INNURED TO TERRORISM AND OUR ELEPHANT PROBLEMS.

As recently as early summer, news of a roadside bomb aimed at our brave troops in Iraq would get headline news and ripple through the publicly traded markets. But, now we all seem to have on mental flak jackets, and the on-going beat of sad news is ignored.

Isnít this blocking out of big, persistent, and often growing, problems a common human coping or emotional defense mechanism? Why are the elephantine problems in the middle of our lives not seen? There are probably a number of reasons that can vary with the size, location and our direct, degree of control of the problems. But, whatever those reasons are, we have to name them, claim them and deal with them before they do us in, especially the ones in our companyís living room.

In case you may have forgotten my most common list of big problems over the summer, here are a few that a lot of physical goods channel players are currently facing:

  • Total people costs are rising faster than the inflation in the product lines, so the standard mark-up and pass-price-increases-along model doesnít work any longer. We need to segment customers and service/price/term them differently according to their niche, size, future growth potential and inherent profitability. We also need to reinvent our service value proposition, sell it and get paid for it.
  • Mature customer segments are consolidating. If we sub-divide these segments into: super profitable core accounts; target accounts within our number one niche that have a future; and super-losing accounts, then guess what? There will be about 15 accounts per distribution location that management (not sales reps) need to focus on to take each to a higher, better level of performance. (For specific how to answers see: "slide show" #10; and, "article" 2.20, "A Strategic Time Management Exercise and just do it!) 2_20.asp.
  • If we want better profits, then we have to have the best, total-product-value-package proposition for one niche of customers at a time. The solution for this challenge will not be found in ever more financial data. The creation of this value proposition will have little to do with obsessing about meeting quarterly financial goals for incentive dollars. Those distractions will just help us to starve the corporate horse we are riding for temporary feed savings before the horse dies underneath us.
  • Every employee can either be part of the value-added reinvention effort or a passive part of the problem. How do we get them enthusiastically signed up for the vision and journey ahead? Turning everyone into "commonwealth capitalists" and making "declarations of inter-dependence" really work isnít easy, but Whole Foods and Costco have done it at both the high end and low end of retail. Why canít we do it too?
  • Part of the sign up process will be to teach all employees the ABCís of corporate finance and how premium wages for a job niche in labor markets can be affordable. If employees canít keep score for their experiments to improve service value and donít know "whatís in it for them", then changes and improvements can't happen. (See the abstracts for the 12 modules within section two of our video "High Performance DistributionÖ" behind the links in the middle of our home page.)http://www.merrifield.com/.
  • Too many sale reps are making too many calls on accounts that canít economically support outside sales coverage, and too much of our marketing air time is still focused on pushing products and product deals to market. Most of us need fewer, better reps calling on the most important accounts that are innovating to have a future and work in-depth to sell, create, install and maintain a lowest total procurement cost, demand replenishment, buy-sell systems. If 90% of our products are mature commodities being sold to mature customers that have bought these items for some time, then those customers want to take total cost out of straight re-buy activity. (See article 4.9 for more. 4_9.asp)
  • AND, THE BIGGEST PROBLEM OF ALL IS FOR MANAGERS TO ARTICULATE OUR UNSPOKEN ASSUMPTIONS AND MENTAL MODELS FOR WHAT IT TAKES TO SUCCEED AND SEE IF THEY MAKE SENSE TODAY. MOST WILL BE FOUND TO BE DATED, AND YET WE CONTINUE TO TRY TO FIT ALL NEW INFORMATION INTO OUR OLD MODELS. (See topic 5 for more help on this.)
    3.    OPTIMISM AND DOING MORE OF THE SAME ISNíT A STRATEGY.

We are now in the final stretch of "Election 2004". Both partiesí, made-for-TV, feel-good, convention infomercials are past. Since FDRís "happy days are here again" with a "new deal", most every candidate for President, except for Jimmy "malaise" Carter, has promoted lower taxes, more entitlements and "morning in America" optimism. Jimmy found that honesty doesnít pay in a popular democracy, and both Bush and Kerry seem to have a Gentlemenís agreement to not talk about our growing triple deficits and un-funded pension and entitlement programs at all levels of our society. The draconian solutions are too chilling. They are both promising, instead, more guns and butter while sending the government VISA bill to our children and grandchildren. Their strategy in a nutshell is: "Donít worry, charge it and be happy!"

Optimism is good and necessary when you seek to change and improve along a strategic path that makes sense and for which the financial math can work. But, cheerleaders arenít necessarily leaders, and positive mental attitude with the wrong mental model thinking will most likely result in the brave 600 charging a bit faster and louder to their demise. Hereís a link to Tennysonís poem, "The Charge of the Light Brigade"(http://eserver.org/poetry/light-brigade.html) just in case you want a great poetry fix that also points out the cost of wrong mental models in the leaderís head.

Do we have the right strategic plan guided by the right, refreshed mental model thinking? If we are trying harder at fine-tuning the same old activities and the bottom half of our payroll canít tell an inquisitive stranger what our best value proposition is for what specific customers in what specific customer niches, then it is time to rethink our assumptions before we do more cheering. If you need help in the rethinking process, I would be glad to have a strategic conversation with you, your management team and then maybe even your troops.

    4.    STILL NO PRICING POWER AND RISING HEALTH COSTS, SO..?

September 10th, the government reported that US producer prices "unexpectedly declined last month". Raw material prices are 22% higher than they were last year, but the PPI is only up 1.5% year-over-year, but the wholesale price index is up 3.4% y-o-y. We could infer that on an average basis, wholesalers have passed on the y-o-y price increases of 1.5% PLUS tacked on another 1.9% to get to the 3.4% figure.

But, a unilateral y-o-y average price increase of 1.9% isnít enough for wholesalers given other news. On 9-10, the Kaiser Foundation reported that health care costs for employees had risen y-o-y by 11.2%. This was the fourth year in a row of double digit increases; last yearís increase was 13.9%. Big companiesí increases are rising more slowly than little companies. The average cost per employee is now $9,950 per family and $3,695 per person. The typical small business plan is now averaging $10,217 per family with employees paying $2,691 (26%) of the total.

The rising costs are the symptom of a health care dragon that I will not attempt to slay today. Here instead is what many companies are doing to cope with the costs and what additional measures some of you may consider. Besides cranking the employeesí share of the medical insurance cost, a most common solution seems to be to put in place a "health savings account" (Google that phrase for more information). These tax-free savings accounts allow employees to then buy high deductible ($1,000 or more) and pay all smaller bills out of pocket. This gives them an incentive to save, be preventatively healthy and shop aggressively for medical services. In time, with enough of these plans in place, it will dramatically change the medical providers' competitive world. I will be interested to see if the medical providers industry lobby can get these HSAís outlawed or so heavily red-taped that they become useless.

In addition to exploring and installing an HSA plan, what if we decided to educate the employees on the math of not just medical expense trade-offs and why they are no longer an automatic entitlement, but where higher total compensation really comes from. Then, we can pursue strategic, value-added productivity that will pay for rising health benefits and a raise. The key guiding metric for this opportunity is: the average gross margin dollars generated/supported by a full-time-equivalent (FTE) employee.

If, for example, the average wholesaler in a given channel is scoring $70,000/FTE per year, why donít we figure out how to get that to 120% to 200% of our industry average by working smarter? FedEx, UPS, LLBean and Costco are examples of service firms in the physical goods logistics space that average 200% for this metric. I would guess that about 90% of private service firms pursue, instead, the hire-them-cheap, work-them-hard to deliver "good" service mental model. Since "good" is undifferentiated and canít support a "best total value service solution", these firms are then stuck with selling commodity tangible products for price which results in profitless price war at best.

If we can sign up all employees to be part of the solution for: defining, measuring, achieving, selling and getting paid for best service for one niche of customers at a time, then we can achieve high margin dollars per FTE. Then, we can pay premium compensation, including higher health care bills, for each job niche on our payroll and still have premium profitability left over for shareholders and reinvesting into a faster growing business.

Achieving service excellence value for one niche of customers at a time is a journey, but it can be done one step at a time IF we can first overhaul the flawed, financially shaped and driven mental models that possess most of us and that run our businesses. For more enlightenment on flawed, financial, mental models, check out this read: ./books/Chapter 2.pdf.

If you want a tool for rethinking and discussing your business assumptions first with yourself, then your management team and ultimately all of your employees, check out our home page promotional information on our revolutionary training program entitled "High Performance Distribution Ideas for All". For those of you who already have the program, it is now available in DVD format and incremental, multiple copies are almost for free, because otherwise people were copying and converting the VHS tapes anyway. It now does not cost more to get a legal, quality copy!

    5.    "THE POWER OF IMPOSSIBLE THINKING"; - WEAK TITLE, GREAT BOOK

When I first came across this book, the title put me off a bit. It smacked, to me, of "the power of positive thinking; dare to be great; awaken the giant within" Ė the same old all-attitude, no-strategy stuff that I touched on in topic 2 above. We need right mental models to craft better strategies with which we can then apply all of the "positive mental attitude stuff to.

But, this book is a winner. It summarizes all the "thinking about thinking" research since before the publishing of Peter Sengeís " The Fifth Discipline" back in í94 right up to the present, and it is an easy, enjoyable read. Check out the reviews at Amazon.com.

The key thesis of the book is that Mental Models in our head determine what we see, and what we think is real, when looking at the outer world. Our mental models provide the framework for our actions and responses in our world; and determine our ability to see, or not see, opportunities. Given the huge role our mental models play in the quality and nature of our lives, we need to get better at thinking about how we think.

The authors organize their book around a four-step, circular process:

  • recognize the power and limits of our mental models
  • test our models against the current environment
  • Identify the inhibitors to changing from old to new models
  • Transform our world (then repeat the sequence)

For each of the four steps of this process, the authors offer a number of specific techniques to apply, which are supported by excellent case study examples.

I have given copies of the book to a number of clients with whom I regularly have been talking about mental models and supporting assumptions, we just didnít call them that. If we become more fluent in mental model speak by thoroughly digesting this book, we can hopefully elevate the art of hit-or-miss strategic conversation to a consistent, scientific process and perhaps a core competency for a management team.

If any of you in reader land are wondering why I didnít send you a free copy of the book, then maybe I will if you can send me an email that explains how I can get a good return on such an investment.

Thatís all for this commentary.

Bruce Merrifield

919-933-7474

bruce@merrifield.com