January 3, 2007 - Distribution Channel Commentary (DCC) # 95

January 3, 2007 - Distribution Channel Commentary (DCC) # 95

 

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TOPICS:

 

1.      THEMATIC QUOTES – Forecasting, Collaboration, Appreciative Inquiry.

2.      FORECASTS FOR 2007 ARE ESPECIALLY SUSPECT.

3.      RETUNE OUR VISION AND CULTURE FIRST, TACTICS SECOND.

4.      NEW ARTICLE ON FILL RATE ECONOMICS.

5.      WEALTH CREATION THROUGH COLLABORATION E-TOOLS.

 

1.      THEMATIC QUOTES

 

Forecasting:

“The herd instinct among forecasters makes sheep look like independent thinkers."

                                                            Edgar R. Fiedler

 

"Some things are so unexpected that no one is prepared for them"

Leo Rosten

 

"Those who have knowledge, don't predict. Those who predict, don't have knowledge. "

                                                            Lao Tzu, 6th Century BC Chinese Poet

 

Collaboration:

"I not only use all of the brains I have, but all I can borrow."  Woodrow Wilson

 

"Great discoveries and improvements invariably involve the cooperation of many minds. I may be given credit for having blazed the trail but when I look at the subsequent developments I feel the credit is due to others rather than to myself."  Alexander Graham Bell

 

Appreciative Inquiry:

“During this summit, we will use a tool that is new to many of us – appreciative inquiry. Appreciative inquiry is a way to rediscover and tap into our core strengths and highest potentials. It also helps us develop our self-talk in a constructive way and encourages us to bring out our best qualities in serving this institution. Appreciative inquiry is a method that helps us develop the goals and dreams that support the future of our Navy. It involves soliciting ideas from people throughout our fleet”…

Admiral Vern Clark; US Navy: Leadership Summit 2001

 

“It could be argued that all leadership is appreciative leadership. It’s the capacity to see the best in the world around us, in our colleagues, and in the groups we are trying to lead. It’s the capacity to see the most creative and improbable opportunities in the marketplace. It’s the capacity to see with an appreciative eye the true and the good, the better and the possible.”

David L. Cooperrider

Appreciation is the strongest emotion we have for attracting what we want and directing where our attention and energy flows to support growth. In the beginning there is a person, alone with her thought, her soul, and her professional spirit, capable of intuitions that are at once great and fragile, simple and complex. For others, real insights come in the company of others. When we dream together, it is the beginning of reality. Dreaming provides the spark of passion; talent is then the firework of its expression; perseverance, the sacred fire of its accomplishment. Appreciation is like looking through a wide-angle lens that lets you see the entire forest, not just the one tree limb you walked upon. Through appreciative inquiry you are able to grow by sharing. (An edited compilation of contributions posted at “The Appreciative Inquiry Commons” at this link:  http://appreciativeinquiry.case.edu/practice/quotes.cfm )

 

2.      FORECASTS FOR 2007 ARE ESPECIALLY TRICKY.

 

It’s the time of the year for reviewing forecasts for 2006 and making them for 2007. Both economic and weather forecasts by experts tend to be quite accurate in the middle of steady cycles and almost worthless or misleading when system variables are turbulent. 2006 was a reasonably steady world for economists, as most markets and assets floated higher on a sea of increasing “global liquidity”. The meteorlogists, in these years of global warming, whatever the causes may be, struggled a bit more. The National Oceanic and Atmospheric Administration forecasted, for example, that up to 6 major hurricanes would occur in the North Atlantic. Over the next 6 months, only two occurred, and zero reached the US, which had a big impact on energy costs this fall.

 

Then, there is always the un-forecastable stuff like: Google’s employee head count growing from roughly 5,000 to 10,000 in 2006. Or, Wikipedia’s number of articles growing from 2.5MM articles to 5.3MM in English, while the foreign-language versions of the on-line encyclopedia doubled to over 200 languages -all with just five, full-time employees.

 

For 2007, economic forecasting could become treacherous. In the US we are in the midst of an unprecedented housing bubble meltdown during which the experts have been consistently wrong to the optimistic side for the past 8 months. (Keep a weather eye on the foreclosure rates and their ripple effects in the sub-prime mortgage area.) But, in spite of big downturns in housing and automobiles, the average economy is still being held up by an epochal global credit bubble fueled by the creation of fiat money supply by all central banks and compounded by financial engineering products. Global money center firms have earned 6 times previous record profits selling leveraged derivatives on top of leveraged derivatives that no one really understands.

 

The credit bubble was highlighted in 1-02-07 issue of the Wall Street Journal, in the “Heard on the Street” column. Key points were:

·          There is a global “liquidity boom” that is driving merger deals (and all stock exchanges)

·          “Most experts see little hint that the cash will dry up soon”

·          “The benign conditions will one day come undone. But, for now, nobody can see how or why.

·          Emerging market stock markets are up 230% as a group from the lows of 2003; Egypt is up 14 fold. (The US markets, however, have been flat over the past few years when priced in Euros or gold because the global purchasing power of the dollar has been steadily eroding.)

 

From Bloomberg on Dec 27th two analysts, Dana Cimilluca and Julia Werdigier observed:

 “As hot as the mergers market is now, it’s about to get hotter. All the variables are in place for acquisitions in 2007 to surpass this year’s record $3.6 trillion. (1) U.S. stocks are trading close to the cheapest price-to-earnings levels in a decade, data compiled by Bloomberg show. (2) Yields on junk bonds used to finance takeovers also are near 10-year lows, according to Merrill Lynch & Co. (3) Leveraged buyout firms have $1.6 trillion to spend, Morgan Stanley estimates. ‘There hasn’t been a period I’ve seen in my career when all of those factors that influence M&A activity have been as strong,’ said Stefan Selig, the global head of mergers and acquisitions at…Bank of America…” 

(Comment: What is your company worth? Are there two or more strategic consolidator buyers for it? Should you sell? The answers are quite personal, situational and contextually specific. However, Inc Magazine’s January issue has some interesting valuation tools and charts at this link:  http://www.inc.com/valuation. Their simple calculator is not worth much, but their PDF graphs are interesting.)

 
But, if you are in a physical goods channel – making, distributing or retailing/dealing stuff – it might be different because there are “two economies”: services (especially financial) are strong, but manufacturing/distribution (especially housing and auto related) are weak:

·          Domestic trucking shipments declined by almost 9 percent in November, marking the largest year-over-year decrease in almost six years. Because more than two-thirds of all manufactured and retail goods in the U.S. are carried by truck, this industry statistic is an economic bellwether.

·          Factory inventories worldwide rose faster than sales in the fourth quarter for the first time since 2001, according to economists at UBS AG in London. Behind the build-up: an unexpected slowdown in demand, especially in the U.S., brought on by the midyear surge in energy prices and a housing slump. The risk is that cutbacks on production and inventory building will start to feed on themselves in the first quarter of ‘07, damping demand further through slower job growth and investment.

·          Housing-related industries shed 145,000 jobs from May though November, according to Zoltan Pozsar, an economist at Moody's Economy.com. Falling home values have also left people with less power to extract cash from their homes through home-equity loans and refinancing, a factor that many economists expect to take a bite out of consumer spending. Along with slumping auto sales, the drop in housing activity has affected all kinds of manufacturers, from drywall factories to furniture makers. The Institute for Supply Management, a purchasing managers' trade group, said that its index of manufacturing activity for November fell to 49.5, the lowest point since April 2003. (Any number below 50 indicates contraction.) By contrast, the ISM's index of service-sector activity for the same month rose.

·          The panel of 60 economists who participated in the Wall Street Journal's latest semiannual economic forecasting survey offered an optimistic outlook for 2007: The service sector should keep humming along as the recent weakness in housing and manufacturing abates and the Federal Reserve begins to reduce interest rates. That would allow the economy to expand at a rate fast enough to keep investors happy, but slow enough to keep inflation at bay.

 

Reading between the lines of the four points above, we can guess at why there seems to be a “widening gap between the super-rich and the rest”. If you lose a high-wage factory job to Asia, you could get two, new service jobs and still not be making as much as before, especially after health insurance costs and reset adjustable mortgage interest costs are deducted. But, the top .01% of taxpayers – about 13,000 in 2006 – averaged $24MM in reported income. These super-earners can’t mathematically all be Fortune 1000 CEOs who are stealing from the shareholders with back-dated options, etc. The other 12,000+ work on Wall Street and run hedge funds to service and gamble on the upside in the global, liquidity-boom, casino economy. This theory also explains why carriage-trade firms serving the hedgies are doing better than Wal-Mart where recycle factory workers can’t buy more year-over-year amounts of goods.

 

Final Conclusions:

1.       The central banks, with the help of Wall Street financial engineering, have cooked up an interesting global economy for us in which a global credit bubble has created other bubbles. This economic backdrop will make market volatility and forecasting especially tricky in 2007.

2.       Forecasts for when and how the credit bubble might end are all over the map. I’ve seen one forecast that believes that it can all continue for 2.5 more years.

3.       No matter what the future brings, there is nothing wrong with running our businesses ever better.

 

3.      RETUNE OUR VISION AND CULTURE FIRST, TACTICS SECOND.

 

One of my distribution-chain clients has had a good financial run for the past three years. One way of measuring their success is by the amount of profit-after-tax (PAT) they have made per full-time-equivalent-employee(FTEEs). For their fiscal year 2003, they made $3000 PAT/FTEE; in ’04, $8,000; and in ’05 $18,000; and in ’06, $28,000. Aside from amazing inflation in some of the core products that they distribute, they have made some smart, strategic, structural productivity moves during this run. But, for the multiple reasons why their profit leverage took off, they realize it can and has already started to go the other way as some of the markets and product pricing has begun to turn.

 

Because all of their stakeholders have gotten spoiled by the last three years, they are asking: how shall we innovate going forward to create new value propositions and wealth for all of our stakeholders? The pithiest answer can be found in a book entitled “The Origin of Wealth” by Eric Beinhocker (which I’m not recommending). The simple, profoundly powerful, three step formula is: 1) differentiate, 2) select, 3) amplify.

 

To unpack this bumper-sticker mantra: we can’t have a unique value proposition for somebody unless we are sufficiently different in a better way than the fast-follower, great execution competitors and the thundering herd behind them; so, differentiate! Try to reinvent what we are doing.

 

Because all of our theories for how to innovate new value won’t strike gold, we should try a number of cheap experiments in which we fail forward as fast, cheaply and learning-full as possible. With this portfolio approach, we must then “select” by weeding the losers to better feed the winners.

 

Once we get traction with some new vector of profitable growth, than we need to “amplify” it. This stage is best led by warriors who are persevering, 110%-focused-and-effortful people. When we: think we have captured all of the new opportunity; are getting bored with the slowing growth rate of our new found success; and we are looking for the next rocket ride – that’s when we should redouble our efforts and renew the same old effort to get the last 30-100% we didn’t know was still out there.

 

But, Mr. Beinhocker’s three-part formula is also missing a few upfront guidelines. I’d advise most companies to start the differentiation work with their very best, core customers within their number one niche of customers. And, when we do figure out how to define that niche and those customers, we will also need the “innovative culture memes” that will enable us to execute the three step formula. For more on “innovative culture memes”, check out our annotated slide show at this link:

http://www.merrifield.com/articles/SixCultureOfInnovationMemes.pdf.   

 

For a seventh “meme” that supports innovation, please consider skimming through out summary notes on “appreciative inquiry” which are posted at our site at this link:

http://www.merrifield.com/exhibits/Appreciative_Inquiry_Exhibit.pdf.

 

4.      NEW ARTICLE ON FILL RATE ECONOMICS.

 

We have posted a new article at our site at this link: http://www.merrifield.com/articles/1_15%20fillrates.asp

 

This article offers specific ideas on how to better: understand, measure, achieve and benefit from higher fill-rates with the same or less inventory investment. With a more complete understanding of fill-rate economics, many manufacturers and distributors will figure out how to partner with either traditional master distributors or a new breed of third-party-logistic, “channel utilities”.

 

If any readers would like to know more about this subject or better-yet contribute to in a collaborative web site space, please let us know.

 

5.      WEALTH CREATION THROUGH COLLABORATION E-TOOLS.

 

Here are two, best-practice, collaboration, case studies that failed:

 

CASE ONE: A large distribution chain created a secure, online forum for all of its sales managers to post questions, answers-to-those questions and other helpful information. The VP of sales and some other HQ types were also in the forum. The guiding assumptions were:

·          The best performers could help the weakest with their questions and problems.

·          General communications from HQ to a target segment of managers could be broadcasted faster through and archived better at a forum rather than snail mail or email.

·          Tactical questions about and answers to time-sensitive marketing programs could be handled better through the forum.

·          And, we all know from kindergarten that sharing is good.

 

Results? Less than 5% of those invited into the forum ever participated and over half had to be personally guided into the on-line forum to see what it was all about and how it worked. The few who used and contributed to the forum quickly stopped investing in the space.

 

CASE TWO: A highly successful software firm created a users group, on-line collaborative space in which no two, competitive wholesale distributor clients were included. The target participants were the top one or more IT people at those client companies. The guiding assumptions and intentions were much the same as in CASE ONE: “no one is smarter than all of us”; collaboration will help all clients be top 80%-ile power users of the software solution across all of its potential applications. And, the results were the same as Case One!

 

Why do both intra-company and inter-company collaboration opportunities fizzle in spite of big upside benefit potential and ever-dropping e-costs for collaborating? Smarter and more experienced people than me have been working on this question, so for instant good insights here are:

A PDF article on the subject at this link:

http://www.ashridge.org.uk/Website/IC.nsf/wFARPUB/Why+in-house+collaboration+is+so+difficult

 

A blog synopsis of the great article above at this link:

http://www.nevillehobson.com/2006/02/27/four-steps-to-overcome-collaboration-obstacles/

 

Who has and who will use e-collaboration tools to create significant innovative wealth? At what rate will this trend catch on? There are three new books out on this subject:

 

Wikinomics: How Mass Collaboration Changes Everything by Don Tapscott and Anthony Williams.

Some key concepts from this just-out book are: Experience the total output and behind the scenes activity at wikipedia.org. How can we harness outside expertise? How can we reduce the transaction costs of producing value? Companies exist because of transaction costs. Doing business by assembling all the right people and resources inside an establishment has long been more efficient than trying to find and coordinate those things in the world at large. For this 1937 discovery, Ronald Coase won the Nobel Prize for economics. What if e-collaboration tools allow companies to rake in expertise from all over and reduce lots of different types of transaction costs, so – for example – “manufacturers” outsource lots of research, design and manufacturing activity?

Open Business Models: How to Thrive in the New Innovation Landscape by Henry Chesbrough. This is a far more academic book which is focused more on how companies might structurally alter their business to incorporate more outside research. There is little on e-collaboration tools.

 

A third “book” is the one that is attempting to be written on-line using wiki-tools at wearesmarter.org. I registered at the site to prowl around, but I think too many cooks for one book might not work as it has for creating over 5MM articles on all kinds of topics at wikipedia.org.

 

Because I do believe that there is real opportunity at the intersection of formal “innovation management” and e-collaboration tools, I’m conducting some of my own experiments at an e-collaboration site (www.near-time.com). I have, for example, set up a “space” for the topics of “fill-rate economics and vendor managed inventory” which is seeded with my fill-rate economics article above. If anyone in reader land would like an invitation to get into the space to lurk, question or best-yet contribute, please contact me. I’m still looking for a way to prove my elementary school teachers were all right about the benefits of sharing.

 

That’s all for this edition. Here’s hoping we all have a healthy, happy and prosperous 2007!

 

Cheers,

 

 

Bruce (bruce@merrifield.com)