October 19, 2005: Distribution Channel Commentary (DCC) # 82

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TOPICS:

  1. THEMATIC QUOTES.
  2. DELPHI’S BANKRUPTCY UNDERSCORES THE NEW WORK REALITY.
  3. THE MATH OF SUPPLIER CONSOLIDATION AND INTEGRATION.
  4. VISIT INDIA TO LOOK FOR COMPONENT OUTSOURCING PARTNERS?
  5. IN THE "CREATIVE ECONOMY" TANGIBLE PRODUCTS ARE COMMODITIES; INTELLECTUAL PROPERTY AND TOTAL SERVICE INNOVATION ARE IN.
  6. "LEAN SOLUTIONS" BOOK REVIEW.
  7. WHAT TO TELL YOUR EMPLOYEES ABOUT HEALTH INSURANCE IN JAN.
  1. THEMATIC QUOTES.

"In times of rapid change, experience is your worst enemy."      J. Paul Getty

"The first principle is that you must not fool yourself – and you are the easiest person to fool."     Richard Feynman

"People don’t even realize they have ‘pre-conceptions’ – they think it is their inner voice of instinct giving them the right answer, and if they were to start questioning that, their whole world would come crashing down. "      Mark Murphy, COO, Andover Coated Products

"The fact that an opinion has been widely held is no evidence whatever that it is not utterly absurd; indeed, in view of the silliness of the majority of mankind, a widespread belief is more likely to be foolish than sensible."      Bertrand Russell

(Comment from Bruce: Making excellent compensation for unskilled work in factories is over. The US needs a new model for creating wealth and sharing it "fairly". Write down all of the principles of your company’s current groupthink and industry-think, then question whether they are totally in tune with the present reality and trends. Groupthink can only hurt you and suppress innovation if you don’t name it, claim it and modify it.)

"Change is inevitable. Suffering is optional."      Unknown

(Comment from Bruce: Manufacturing will continue to go to Asia on an accelerating basis; don’t fight the tide of free trade realities, go with it.)

"The art of progress is to preserve order amid change and to preserve change amid order."     Alfred Lord Whitehead

(Comment from Bruce: Are you striking the right balance and budgeting of resources for both fine-tuning the business and changing it in significant value improvement ways?)

"The map is not the territory."      Alfred Korzybski

(Comment from Bruce: CEO’s stop looking at numbers, get out there. Ask thoughtful questions about the living and dying edges of your best suppliers and customers’ businesses; dive deep; ask ‘why can’t we find a better way’.)

  1. DELPHI’S BANKRUPTCY UNDERSCORES THE NEW WORK REALITY.

Delphi Corp.’s declaration of bankruptcy this past week marks the beginning of the end of a 75-year-old way of life in America in which unskilled workers could be highly paid because they were in a union with (domestic) monopoly power or could threaten to form such a union. The industrial welfare state is crumpling due to: global competitive pricing pressures; limits on how much import taxes and quotas our government can indirectly charge all of its citizens to protect too few, great factory jobs; and the fact that US consumers are no longer willing to pay more for inferior-quality goods.

The auto industry looks like it may start domino-ing its way through bankruptcy to lower labor cost structures, just as the steel and airline industries are already doing. There will be lots more noise about taxpayer bailouts for Delphi and then the rest of the big-auto web of companies, but whatever comes out the other end will feature dramatically reduced wages and benefits. And, the benefits will be defined contribution solutions, not guaranteed levels of benefits.

The big lessons for all of us – once again – are:

  • We are in a global economy. If any or all of our jobs can be outsourced, then total compensation is not going up and may go down unless we participate in some kind of innovative measures to increase our value for customers in ways that can not be immediately copied by everyone else locally or planet-wide.
  • Good rising compensation for the average US citizen will only happen if a person has a good formal education and on-going, on-the-job learning to be part of continuous value innovation. We’ve heard about the importance of working with a "learning company" for 15 years. Are we currently budgeting resources to continuously innovate in ways that provide more value to customers and/or lower costs? If not, it is time to think about how to start.

For more on how to start being a more successful, continuously innovating company, hold this time slot for a tele-seminar entitled "Innovation 101": Thursday, January 26th from 2 to 3:30 PM EST. The seminar will be sponsored and promoted by the newsletter, Modern Distribution Management.

For more innovation-centric ideas, you are welcome, in the meantime, to review these documents: our past few commentaries; our latest article (#1.11 at this link: http://www.merrifield.com/articles/1_11.asp) and our latest posted slide show (#13 at this link: http://www.merrifield.com/articles/Innovate%20or%20Die.pdf.)

  1. THE MATH OF SUPPLIER CONSOLIDATION AND INTEGRATION.

Amidst the storm of news about Delphi and how it will affect GM, the news that Ford will cut its number of suppliers in half – again – may have been lost. If you want to read the details, here is one of many news links that you can get through a Google news search: http://today.reuters.com/business/newsArticle.aspx?type=basicIndustries&storyID=nN29384562.

If you would like to know the exact math of how much you might reduce total procurement cost by consolidating suppliers, you might check out the articles, etc. at www.thehackettgroup.com. This firm has been promoting 5% total savings through vendor consolidation for some time.

Another way to improve total procurement cost by another 4 to 5% is to formally score and "work with" your key vendors on a number of quality and service factors. An article in "Purchasing Magazine Online", which I stumbled across, provides some very specific case studies on how to do this starring Kennametal and Air Products. Here’s the link: http://www.purchasing.com/article/CA508544.html.

If we bought 5% + 4% better from our key (duplicate) vendors, wouldn’t that be a big competitive advantage? Can we sell our best customers on why they should consolidate as much of their purchasing with us, because our total service excellence metric package saves them 4% and allows both of us to pursue consolidation benefits together? If you haven’t formally – defined, measured, achieved, sold, gotten paid more for and leveraged basic service excellence into consolidation selling – then you might want to read the summary statement for sections 4.1 – 4.13 for our DVD-based training program entitled: "High Performance Distribution Ideas for All" at this link: http://www.merrifield.com/video/summary_notes.doc.

  1. VISIT INDIA TO LOOK FOR COMPONENT OUTSOURCING PARTNERS?

As the migration of many types of manufacturing continues to flow to China, manufacturing companies in the US are now starting to look at India for either component or generic brand sources for a number of reasons. Some are:

  • The Indian economy is growing 7-8% per year due to more liberal fiscal, industrial, labor and trade policies.
  • India has its most stable and forward-looking government ever.
  • The success of India’s IT companies in doing business process outsourcing and now, consulting services for the world has motivated India’s manufacturing sector to follow.
  • The manufacturing sector has dramatically been improving both cost and quality.
  • The educated management of Indian companies read, write and speak English.
  • And, India is a functional democracy with a court of law that protects both physical and intellectual property rights whereas China’s government could change its business rules whenever they might like to.

I’ve been working with some Indian people involved with India’s Export-Import Bank to explore the feasibility of helping US trade associations co-sponsor meetings with the ExIm Bank to meet their logical counterpart manufacturers in India. The objective would be to accelerate the creation of joint ventures between US manufacturers looking for component producers and direct-buying distribution chains looking for sources for private-label, whole goods.

If some of you in reader land have any interest in either promoting or participating in such an organized trip to India for a given manufacturing sector or distribution channel, please let me know.

If others feel that this is an un-patriotic activity in anyway, I am truly sorry and would be glad to discuss our difference of opinions. For those of you whose home towns are and will be further affected by layoffs, and for those of you whose businesses are highly dependent upon selling into the domestic auto-supply web, my sincere regrets.

Looking at the bigger, longer-term picture, you might even consider going on such a trip to realize what a big task it will be to turn back the global, free-trade tide. Because "Change is inevitable..", you may eventually decide that you can’t fight it and go with the tide, because two adults don’t engage in a free trade unless they both feel that they are better off for it. As for creating good factory jobs like the UAW will be rapidly losing, the US needs another model for how to create wealth and share it "fairly" with its citizens.

  1. IN THE "CREATIVE ECONOMY" TANGIBLE PRODUCTS ARE COMMODITIES; INTELLECTUAL PROPERTY AND TOTAL SERVICE INNOVATION ARE IN.

I first came across the "creative economy" in a book entitled: "The Creative Economy - How People Make Money from Ideas". It is authored by John Howkins and was published in the UK in 2002. I’m not recommending this book as a good read, but here are a few facts from it:

  • Britain makes more money from music than it does cars.
  • The copyright industries of the US achieved foreign sales and exports of over $60B in 2001 to become the number one export sector.
  • Through the ‘90s the creative economy grew twice as fast as the services industry and four times faster than manufacturing.
  • And, patentable intellectual property is the lifeblood of the creative economy and needs to be respected and protected all over the world.

Many of us vaguely knew the drift of these facts. But, Business Week borrowed the term "creative economy" for a special report issue that came out August 1, 2005 and took the term to another level. Since 2002, the importance of having the right, smart people who create patentable stuff has not changed. But, now the internet has wired the world allowing every company to:

  • Outsource to dedicated, 3rd party specialists whatever a company doesn’t think they are #1 in the world at. We all have to become a bit more like Nike, which is a design, R&D, marketing company with the rest outsourced to partners who are #1 in the world at doing their particular activity (contract manufacturing, call centers, back office processing, logistics, commercial web sites, etc.)
  • Find these partners? Google any need or idea and sponsor ads pop up from around the world, then check out the solution providers’ web sites, etc.
  • Find out what (obscure and niche) products are being sold in the world for what price? Froogle any product at Google and see who is selling it on-line ranked from the lowest price up.
  • See what excess products are being sold and for what price? Ebay any product and see who is selling it at some distressed starting price for a potential auction.
  • Instantly learn more about whatever they want again through Google – their modest mission is "to organize the world’s information". Sales of non-fiction, how-to books have dropped from 12% to 2% of all book sales over the past 5 years because many people can get more on a subject than they need quickly via Google and Amazon book reviews.

Also, "lean production", originally invented by Toyota, has triumphed. According to the authors of the great book, "The Machine that Changed the World"(published in ‘91) by Womack and Jones, making sufficiently perfect, clone products anywhere in the world is not a problem. All tangible products, even new ones that aren’t patent protected, are quickly commodities. But, in their latest book "Lean Solutions", they point out the big opportunities in the total "provision process" for tangible goods. In other words, think about service value innovation and read a bit more about "Lean Solutions" below.

So, what should any business, small or large, be doing in late 2005 to be a player in the "creative economy"? The answer is: to learn how to become a more formally, consistent innovator using all of today’s new innovation tools. Could "be more innovative" be a corporate New Year’s resolution to consider? We’ll have lots more to say on this topic in forthcoming commentaries and articles. And, don’t forget to mark your calendars for Jan. 26th!

  1. "LEAN SOLUTIONS"- BOOK PLUG.

This book was released on 10-4-05; it is so recently published that it has no reader reviews nor ratings as of 10-17 when I typing this. But, you might read the fluff that is there at Amazon and skim through the past books by Womack and Jones.

Then, consider this out-take quote: "The triumph of lean production: lean production works in every company, industry and country where it is seriously tried... But, despite a growing variety of better products with fewer defects at lower cost available from a growing range of sales channels, the experiences of consumers seems to be deteriorating. There are more and more consumption decisions for consumers to make, ...but consumers will never have more time in their day.." (Comments from Bruce: too many managers act as if production stops at the office door or the factory gate. So we now use the term lean provision which comprises all of the steps required to deliver the desired value from producer to consumer, often running through a number of organizations.)

The best thing this book does is to teach us how to flow chart, then time and expense exactly what a customer goes through in the activities that surround buying something, obtaining, installing, integrating, maintaining, repairing, upgrading, and recycling. By rethinking how we can make some or all of these steps easier for the customer, we can create win-win results for our companies and our customers. If the average wholesale distributor could get fluent with this type of mapping and thinking, they would find lots of service value innovation opportunities within their best customers within their best customer niches. All manufacturers that sell through channels populated by one or more independent creatures – reps, distributors and/or dealers – should read this book and apply its concepts through your channel partners to create strategic value and advantage for everyone in the value chain. Enough for now!

  1. WHAT TO TELL YOUR EMPLOYEES ABOUT HEALTH INSURANCE IN JAN.

70% of US employees work for companies that have fiscal year ends of 12/31. They will get the news that their health insurance will cover less and cost more in January. If you are not sure what to do about this problem, read an article in Business Week’s 10-24 issue entitled "A Bad Case of Sticker Shock". It will tell you the ABCs of health savings and retirement accounts and how to explain things to your employees.

BW doesn’t let you read their articles without registering "for free", but here is the link to the beginning of the article: http://www.businessweek.com/magazine/content/05_43/b3956130.htm.

If you want to think more broadly about how to turn health care insurance into a competitive advantage and part of a high performance culture, you might want to skim through our articles numbered 5.15 to 5.19 at http://www.merrifield.com/articles/.

That's all folks!

Bruce

Bruce@merrifield.com