April 26, 2006: Distribution Channel Commentary (DCC) #87


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For regular readers of these commentaries, it has been too long for both of us. This is the first DCC since mid-January, and Iíve actually missed doing them. But, my consulting workload has gotten too hectic to squeeze them in. There have been two, main, time-consuming and very interesting distractions from my charity writing:

First, I have entered into a contract, turn-around assignment here in NC for an MRO, consumable supply distributor in which Iím acting as a co-CEO with the owner on a substantial earn out basis. Thanks to being able to use our DVD-based training tapes for "high performance distributionÖ.", we are making rapid progress. And, it is great to be back in a hands-on situation in which we are trying many, cheap experiments to fail forward in a fast-learning and improving way. Although I do not have the time currently to undertake another turn-around, I would be delighted to visit with any readers about the process and other possibilities if you should have a company or a branch in need of a transformational fix.

Second, Iíve taken on a legal-case, expert witness assignment that will take up most of the rest of my time through at least early July. This is only the second case Ė over the past 20+ years Ė that Iíve agreed to participate in because I will only work for clients that have Ė what I think is Ė a clear cut, theyíve been wronged case. And, in this particular case, not only are the stakes very high, but my client is one of the best-run distribution chains in America. Although Iím not a litigious person, this assignment, because of both the case and the terrific people/company, is an honor and a joy. Again, I do not have the time right now to consider any other case assignments, but I would be glad to visit with any readers about possibilities that they may have in this area.

Otherwise, in between the cracks of my activity, I keep plugging away on figuring out how I can help companies become more consciously and systematically innovative. Some miscellaneous contributions follow in #2 below.


"Questionate to innovate" is a phrase coined by a consultant named Gerald Haman. He recommends that managers not rush to either the definition of a "problem" or the "solutions" to that problem, but rather spend a lot more time asking, rephrasing and writing down questions about the general area that is seen as problematic or opportunistic. These questions should then be collected into a "question bank" which will allow both initial and new, diverse participants to revisit, edit and add to those questions.

In the spirit of questionating:

  • By not rushing to judgement on both the problems and the opportunities, any extended group will become more creative and effective at innovation attempts. How? Why?
  • Why are we all in such a rush to be the expert that knows what the problem and/or the answer is, along with the one best execution recipe? How do we convert from being a "knower" to a "learner"?
  • When we live into the question Ė to paraphrase Rilke Ė our selective perception changes and we start to notice and hear new information, as well as have different conversations with different types of people. We also start to comfort zone different scenarios and beliefs. Why are these good things?

A variation on the "question bank" idea is the "question map". Regular readers and merrifield.com site visitors may have checked out my "question maps" for several different topic areas that are posted under the "exhibits" button and are numbered 30 to 33. You can start with this link: http://www.merrifield.com/exhibits/Ex30.asp

In order to think about how and why we should do questioning ever better, I have also put together an exhibit on Questioning that was posted on our site as exhibit #40. This exhibit has been overhauled, because I keep asking myself questions about it. Skim through this one at this link: http://www.merrifield.com/exhibits/Ex40.pdf

More good questions about some opportunity areas can start a chain reaction:

  • We start to look at old problems in new ways with new information and new beliefs (think of the 5 blind men pooling their observations about parts of the elephant).
  • We then generate lots more good ideas on how to approach the real, root, root causes of what we thought were initial problems.
  • Those ideas get further refined and winnowed down to a few really excellent ones.
  • But, then we have to act and that takes courage, resources and "luck".

Hereís a next, big question: how do we wake up, as well as make, both corporate and personal luck? If you want a "value-added" list of quotes and comments that address that question, please check out our new exhibit #41 at this link: http://www.merrifield.com/exhibits/Ex41Luck.pdf

If you get inspired by our exhibits on questionating and waking up your corporate luck, then you might want to start an internet-based "question bank" that team members and invited outside kibitzers can check into to read, add and edited questions. There is a new segment of web services that are popping up that allow you to create secure collaborative spaces for question banks and many types of collaborative activities. Iím working right now with a client that offers just this type of service. Go to www.near-time.com and check it out. If you would our assistance in understanding how to use the service, setting up a space, etc. contact Karen Green at karen@merrifield.com. Karen is rapidly becoming an expert on how to use this new type of tool.

And, hereís one last corporate innovation management opportunity for the first 18 readers who call us for this free offer. (NOTE: to be eligible you must have spent in excess of $1000 for past purchases of any and all of our profit building services or products.) The offer is a copy of the case study from the Harvard Business School entitled: "Best Buy Co. Inc. (A): An Innovatorís Journey". This case was first published in í03 and revised, re-published on November 16, 2005.

The case recounts how Best Buy worked with Gary Hamelís innovation company, Strategos, to find new ways to reinvent itself after it had, from a late start, caught up with and innovated right by Circuit City and other retailers selling consumer electronics. Every company should start thinking about how they could do a simpler, less-expensive, but sufficiently effective version of this journey. Itís a great read, and if you read it, then we can discuss it!

So, if you are interested and qualify as a good enough past customer, be one of the first 18 to contact us. If any of the rest would like to order a copy for about $6 (with a flat handling charge), you can do so at this link: http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml;jsessionid=XWNSYIP14SM3KAKRGWDR5VQBKE0YIISW?id=604043.


The recent acquisition of Hughes Supply by Home Depot set a high bar for valuations of distribution companies. It seems that with:

  • The general stock market averages trading at a high P/E multiple
  • A big excess of funds raised by private equity firms for doing leveraged buyouts, and..
  • Many distributors making good profits turbo-charged by inflation appreciation in their inventory that are not taxed if on LIFO, but counted in EBITDA buyout multiple valuations . . .

Now may be the best window ever for selling a distribution company. What is the specific news on distributor buyouts? What are the trends in both public and private valuations for distributors? What are the specific numbers? All of this information has been compiled and is being shared by a boutique investment advisory company out of Chicago, Starshak/Welnhofer (S/H), in what may become a monthly report. (Their web site is at http://www.swandco.com )

I bumped into these guys on a deal that we were both involved in and agreed to give them a plug in this DCC, because they:

  • Were very competent in advising the common client on the sell side.
  • The report that they put together was totally focused on distribution companies, quite comprehensive and even had some novel valuation methods.
  • And, the report is free to those who contact the firm at 888-461-1030.

If you do contact them, tell them that I sent you. If you would like to talk with one of the principals, ask for Bill Welnhofer who is the chap that I have been working with.

Otherwise, the big question is how long will these valuation multiples last? But, that question in turn depends on:

  • How long do you think the bubbles will last for global consumption of commodities going into construction and infrastructure?
  • When will we have a US consumer retrenchment due to: energy costs and rising costs of ARMs and home-equity loans while incomes for the bottom 80%+ of Americans are not going up?
  • If the US goes into a recession, what will happen to the economies of supply-chain Asia?
  • Then, what will happen to the demand (and speculative price premiums) for commodities?
  • LIFO accounting works great when the economy grows and inventory prices go up, but it cuts the other way when the economy cools and inventory deflates. How do all of these issues effect distributor evaluations and the expansion or compression of valuation multiples?

S/Hís report provides information that should be part of the conversations that we should be having about these economic issue questions.


Thatís all for this edition; no promises on when the next one might appear. Work hard, do well and keep innovating!