January 18, 2007 - Distribution Channel Commentary (DCC) # 96

January 18, 2007 - Distribution Channel Commentary (DCC) # 96

 

Greetings:

 

If you know what these commentaries are about, go to "TOPICS" below; otherwise, read on.

 

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TOPICS:

 

1.      THEMATIC QUOTES – motivation, free throws, forecasting, complex systems.

2.      INSPIRATIONAL VIDEO URL (PLUS QUESTIONS).

3.      NBA FREE THROW TRAINING AND YOUR FIRM’S PRICING MATRIX.

4.      WEED TO FEED AND INNOVATE.

5.      LESSONS FROM NARDELLI’S EXIT AT HOME DEPOT. (ACE IS THE PLACE!?)

6.      BRUCE’S LIVING (BLEEDING?) EDGE RESEARCH TOPICS.

 

1.      THEMATIC QUOTES/EXCERPTS:

 

“People often say that motivation doesn't last. Well, neither does bathing - that's why we recommend it daily.”                       Zig Ziglar

 

“What’s amazing is, these guys have seen miles of film running up and down the court and the coaches are yelling at them, but not one in a hundred has been filmed standing still shooting a free throw...There are 41 common problems that Boren is looking for in the footage, but he cautions that merely telling a player what he is doing wrong will not help him. He must first deal with the mental barriers that players put up...“They all think they’re better shooters than they are....I’m trying to take what they’ve got — because they’ve already shot thousands of shots — and tweak their shot in the most important areas that will give them a shot to get better.”....Their muscles like it the old way and they’re not paying attention to any of this stuff. So when we get down there, the muscle memory is going to resist.”

            Excerpts from: “Investing in Free Throws Pays Off” by Benjamin Hoffman. 1-15-07, NY Times

 

"Forecast: Hazy (with a 50% chance of error). Why making a science out of predicting the weather has been a lot harder than anyone guessed it would be?"

                                                Discovery Magazine article title by John Marchese

 

 

“The economy is a marvel of complexity, yet no one designed it and no one runs it. What's a measure of the complexity of the modern economy – the number of distinct products, or “stock keeping units”: in a stone-age culture the number was a few hundred; in today’s New York, the number may be 10bn. How can such a system have been created? Why has complexity increased over time? Why has so much of the rise in wealth and complexity been so sudden?  Because the economy is “a complex adaptive system”, which works under the same logic as biological evolution – differentiate, select and amplify....“Markets win over command and control, not because of their efficiency at resource allocation in equilibrium, but because of their effectiveness at innovation in disequilibrium.” ..Markets are innovation machines. Companies don’t innovate; markets do.” So businesses should think in terms of evolutionary adaptability. But they find this difficult, because they are far better at executing plans than adapting to unforeseen circumstances. That is the price they pay for hierarchy.”

Excerpts from:  The Origin of Wealth: Evolution, Complexity and the Radical Remaking of Economics (Random House, 2006) by Eric Beinhocker.

 

2.      INSPIRATIONAL VIDEO URL (PLUS QUESTIONS).

 

Need a motivational fix? Go to this URL:  www.212movie.com and get cranked like I did. A key premise of this specific fix is that at 211 degrees, water is hot, but at 212 degrees it: boils, gives off steam which can power things to make a big difference and the winner takes it all. So, give that last 1% (assuming that: you aren’t at room temperature; you already have a functioning locomotive to power; and the locomotive is headed in the right, strategically- fruitful direction.)

 

After watching the show and before you spread the spirit around your firm, make sure that you have built the perfect bonfire, so that this one motivational match (or others) will ignite something that burns steadily. Individuals within most firms aren’t going to do any better, in the long run, than the horse that they are riding. (Brokers on commission who deliver 100% of the value-added to clients who would buy from the broker regardless of the host firm might be exceptions to this assumption.)

 

 What’s the recipe for building the perfect bonfire that motivational matches can ignite? Check out this exhibit at our web site:  http://www.merrifield.com/exhibits/Kinetic_Chain_Ex_16.pdf.

 

·          If you need, specific how-to’s for each of the seven layers that go into a good bonfire, then you should invest in our DVD-based training program “High Performance Ideas for All”, which is well advertised on our home page.

 

The average New Year’s resolution about health habits (the first and biggest wealth) lasts 15 days. In 2007, what corporate resolutions are we undertaking to enable our employees to have longer-term, sustainable, strategically-directed hope and motivation? How can we avoid trumpeting intentions that get some employees cranked to try harder for two weeks before they succumb to the corporate morass of business and work as usual? For more ideas on how to move towards a “high performance service” company, we are standing by the phones and email box.

 

3.      NBA FREE THROW TRAINING AND YOUR FIRM’S PRICING MATRIX.

 

Here’s how a NY Times sports article started out on 1-15-07:

 

“The Dallas Mavericks, the N.B.A.’s top team this season, are no strangers to winning ways, but in getting an edge on opponents over the past several years, they have gone beyond sheer talent.

 

The Mavericks have what amounts to a secret weapon in Gary Boren, an investment banker who is the N.B.A.’s lone free throw coach.

 

Boren, 67, has been with the Mavericks as an assistant since 1999 while working in banking. He is an adviser to The Equity Group, which is based in Dallas. Since he joined the Mavericks, they have finished in the top six in the league each season in free throw shooting, including four first-place finishes. This season, Boren has them at 80.7 percent, the fourth time his team has been higher than 80 percent at the line.”

 

For the rest of this interesting article, go to the following link which is posted at a fan site for a competitive NBA team, the Cleveland Cavaliers, along with interesting fan discussion comments:

http://www.realcavsfans.com/showthread.php?t=6502.

 

Here’s a tangential question that relates to our own businesses: if free-throw-coach Boren looks at 41 different facets of a person’s free throw motion, how many different ways does your company look at how it prices all types of products for all types of customers often at many different locations? If you could systematically, change a lot of little, over-looked details about pricing at your firm, isn’t it reasonable to expect that you could increase your operating profit line by a minimum of .5% on a consistent basis? The answer is YES! And, the “coach” is Scott Benfield, a friend and colleague who has delivered even better than .5% improvements to the bottom lines of several of my distribution clients.

 

Who’s Scott? What’s involved in his “Pricing Audit”? Here’s a paragraph I asked him to share with me to share with you:

 

“A Pricing Audit is an intensive 3 to 6 week review of pricing practice.  The goal of the audit is to develop a market based pricing system where prices are analyzed and changed rationally for profit enhancement. Market based pricing starts in the marketplace reviewing customer types, their service requirements and product needs and arranges pricing around these variables.  This mitigates the limited margins of the cost plus pricing while giving the firm an appreciation and understanding of how pricing is driven and drives individual segments.  The audit also reviews cost recovery pricing in services and transaction types.  The audit delivers a go forward plan that the firm can use to build a lasting pricing system.  Gains of 1% to 3% of sales are common.”

 

How do you get in touch with “The Man”? Check out his site at www.benfieldconsulting.com; call him at 630-428-9311; or email him at : bnfldgp@aol.com. Tell him that: I sent you; you are looking for found money just laying around on the ground in your business; and that you want to get many times your return on your investment in him in 2007.

 

In closing, what other aspects of our business could we systematically improve if we just super-focused on improving it 5 to 41 different ways? It should be a big number, because 1% improvement in big numbers is a more interesting result than 1% of small numbers. The 1% improvement should also have a high flow through to either the operating profit line or to the pre-tax return on total assets ratio. Raising prices, for example, has a much higher flow through (about 20 to 30 times higher) than increasing sales volume by 1%. (Why?)

 

Aside from doing what Scott B. has done for many companies in many different channels with a lot of implementation savvy, what would be the next best number to improve: “cost of goods sold”.  But, you don’t want to just buy lower by 1%, you want to buy better. So broaden the objective to buying at the lowest “total procurement cost” which will also improve the company’s inventory “turn-earn” and “fill- rate economics”.  

 

For additional insights into these more comprehensive metrics? Check out these documents:

 

“Go deep on fill-rate economics” at: http://www.merrifield.com/articles/1_15%20fillrates.asp.

And, “Purchase Better with the Total Procurement Cost Model” at:  http://www.merrifield.com/articles/4_3.asp.

 

4.      WEED TO FEED AND INNOVATE.

 

I was reading a newsletter the other day that included an interview with the authors of a new book entitled: Reaping the Rewards of Innovation. One of their big insights was actually very, old wine in a new bottle: (in my words) if you are spending all of your resources on aspects of your business that lose money or even breakeven (“cash traps”), then you have no spare resources to invest in one or two of the best new ideas your company has for being innovative.  

 

Is the idea that “cash traps” bog you down and should be weeded to feed winners so old that it is new? Why don’t we want to look at our past, accumulating mistakes within the business? Why not admit we were wrong, learn our lesson and reinvest our resources smarter in new initiatives?

 

So, shall we resolve that in 2007, we will:

·          Regularly rank the profitability or effectiveness of our – customers, products, people and profit-centers to FIRST

·          Shape up or out the losers to both free resources and learn lessons of what not to do the next time…

·           TO THEN reinvest those freed resources into ONLY the very best, few winners or new ideas – in a more enlightened way – as opposed to letting resources flow democratically to all other remaining elements?

 

If anyone needs any help in: measuring profitability or effectiveness of different elements in your business; ranking them; and then figuring out how to strategically and deftly:

·          Weed to feed in a learning way;

·          Prune to grow in a narrow, strategically effective way; or,

·          Downsize, upgrade, refocus, reinvent and renew.

Then, let us know.  

 

5.      LESSONS FROM NARDELLI’S EXIT AT HOME DEPOT.

 

Bob Nardelli switched from being a manufacturing, Sr., Ex. VP at GE to being CEO of Home Depot (HD) in 2000.  He was brought in by HD’s board to formalize and streamline the highly decentralized company in which Store Managers had ruled in an intrapreneurial way with total dedication to best customer service. After 6 years and 210MM in total compensation, Bob got fired.

 

How did he do by the “objective” numbers during his “reign” (because he was imperious in an off-putting way to most stakeholders)? Fans would say “solid” and cite these stats during Bob’s watch:

·          Sales grew from $45.7B to $90 (almost a double in 5 years for a 15% compounded rate).

·          Net income grew from 2.5B to 5.9B (a 130% increase) , and

·          Return on shareholder equity averaged about 17%

 

Detractors would point out that:

·          While the Dow Jones average corrected from its 2000 peak and then returned, HD’s stock price declined 8%, but more importantly Lowe’s, a direct competitor, stock price went up by 130%!

·          Given the roaring housing bubble and inflation in the product line HD handles, HD’s numbers and stock price should have kept up with housing-related industry stocks which HD did not.

·          Bob borrowed $6B to buy sales and earnings growth by diversifying into a number of wholesale distribution supply channels rather than organically innovate and upgrade within the core business as Lowe’s has continued to do.

·          Bob used most of the rest of the free cash flow from the company to buy back stock and pay higher dividends in order to grow earnings per share and try to boost the stock price when again it could have been reinvested in reinventing the core stores value proposition.   

·          Bob alienated both managers and workers at the store division by: bringing in GE folks for top spots; hiring part-time employees at the stores to cut total employment costs (and service quality); and taking power and service flexibility away from the store managers.

·          Bob hurt local store fill-rate satisfaction for customers by centralizing all purchasing to then standardize product buying, beat up suppliers for lower prices, etc. This all makes good short-term financial sense, but has greater, negative, short and long-term service economic effects. (Want to read my analysis of a chilling difference in head-to-head, same store sales between Lowe’s and HD from three and half years ago? Go to this link: http://www.lbmjournal.com/articles.pl?id=38&catnum=3.

·          Bob made a big deal about using “six sigma”, a quality-consistency, process-improvement methodology branded by Motorola in the late ‘80s and used widely by GE in the ‘90s. This methodology is a management tool - not a strategy - that might be better suited for manufacturing light bulbs than improving spontaneous service encounters in stores and should always be used to serve a specific strategy.

·          As the final straw, Bob angered shareholders at a recent meeting by: running the meeting himself;  refusing to answer questions about his rising compensation and the declining stock price; and out of frustration closing the meeting early. He did a “listening tour” to try and repair the PR damage, but he never said he was sorry.

 

What else can we take from this sad tale?

·          The pain isn’t over. The minority shareholder that lobbied successfully to get rid of Bob would like to spin-off HD Supply, because it is a different business that distracts from renewing the core.

·          There is the threat of a proxy battle to unseat three board members who have served so long that they seem to have lost touch with the changing marketplace illustrated by their decision to bring in Bob and stand by him.

·          Who will turn around the core business and how, especially considering we are now in a post housing-bubble economy? For you readers that are familiar with the “people-service-profits” chain, realize that Lowe’s has all of the virtuous cycles within that model going; whereas HD currently has vicious cycles going. Lowe’s continues to kill HD on service/customer retention economics. (For more on the service profit model see this document:  http://www.merrifield.com/articles/3_7.pdf ).

·          Ace Hardware is the c-store + knowledge place version of Lowe’s. Ace has imitated Lowe’s great service and women-friendly marketing in the c-store niche. Any “pure wholesaler” that sells only to second step dealers (not end-users) should go to this article and create an exhibit of all of the things that Ace has done in the past X years and decide how the elements of that strategy might apply to your business model and how your dealers sell, because it is working:  http://www.usatoday.com/money/industries/2007-01-18-ace-hardware_x.htm.

·          HD paid top dollar for its distributor acquisitions. Will this be the end of the consolidation of distribution businesses at ever higher EBITDA multiples? Perhaps not. The global liquidity, credit bubble for buyouts is still expanding. And, more narrowly within the distribution world, EBITDA multiples seem to be creeping up after hitting a plateau last summer. Check out the graph in the January edition of Starshak & Co.’s “Distribution News” at this link:  http://swandco.com/distnews/Distribution_News_January_2007.pdf.

·          And, as Peter Lynch, the super-star fund manager once said about investing in public companies:  “Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it.”

 

6.      BRUCE’S LIVING (BLEEDING?) EDGE RESEARCH TOPICS (in case you care).

 

In order of most interesting and credible to most people to least interesting/relevant or incredible, I’ve been doing a lot of reading, thinking, discussing, etc. on the following topics. If anyone in reader land wants to talk about these future-looking opportunities, please feel free to contact me.

 

A.      Innovation Management.  I have even added a section button for this topic on my web page that you might check out. But, a big problem is the great majority of mature businesses have trouble doing whatever they are doing at the next level: improving from yellow belt to green. So, I have started to take a more granular look at how a service firm might look at the following series of related challenges:

a.       Define a specific niche of customers that is core to the company.

b.       Define with a number of service metrics what “perfect, expected service” is for that niche.

c.       Figure out how to measure, post and track those metrics at least daily for all service employees to see and understand.

d.       Motivate and enable all employees to work together to change in order to make consistently, distinctive, measurable levels of service happen.

e.       How to hire, motivate and keep the type of employee who will fit into this “high performance culture” while weeding those who just can’t, won’t fit in.

f.        Once achieved, how to sell and get paid for distinctive service value that actually lowers the customers’ total procurement cost; total (life-cycle) cost of ownership; and/or maximizes their personnel productivity and profits – even though the actual price of the commodity is higher from the best value seller.

g.       How to leverage best, service-reliability economics by creating next-level, demand-replenishment systems with best customers that “get it”, can do it and have a growth future.

 

B.      Innovation/High-Performance Guidelines or “Memes”.

a.       The objectives in part “A” can’t be achieved if a company does not have an innovative “culture” – core beliefs, values, behavior norms and metrics – that will enable continuous improvement and all types of innovation to happen.  

b.       Within a culture, the smallest, indivisible unit of information that can be transmitted from one employee brain to another has been called a “meme” (rhymes with gene or dream). The pseudo-science of management by memes is called “memetics”. Go to wikipedia.org and search for these terms to read more than you want to know:

http://en.wikipedia.org/wiki/Memes &

http://en.wikipedia.org/wiki/Corporate_culture.

c.       Many innovative memes that are pre-requisites for any organization to change are incorporated in our DVD-based training program: “High Performance Distribution Ideas for All”. But, they are not called that, nor are they all broken down into their most indivisible meme-level. Some innovation memes that are specific to learning how to go to the next-level (continuous improvement) and then going in yet other directions are in a slide show that we recently posted at our site at this link:  http://www.merrifield.com/articles/SixCultureOfInnovationMemes.pdf

 

C.      Factory Logistics Co-ops (see the CoLinx story at http://CoLinx.com/ ).      

 

a.       As US manufacturers move some, or all, of their production to Asia, they have the problem of blending in-bound containers with what might still be made in the US and getting to distribution centers ever faster. CoLinx is the first and only factory co-op that I know of that has: 1) provided the domestic/import remix solution; 2) taken the participating factories out of the LTL shipping activity; 3) created big enough hub economics to provide daily pool-lane delivery to downstream distributors and 4) given all distributors natural logistical incentives to enter all orders electronically. CoLinx co-op members have dramatically reduced their costs for: shipping, warehousing and handling finished goods; and inside sales order taking. The distributors have collapsed their average inventory investments while improving their fill-rates, and special orders can be in their warehouse in one day without any extra paper or freight charges. The factories that don’t participate in the co-op will lose over time unless they join or are able to create an alternative co-op with the same critical mass, hub economics. This business model is a game-breaking, rule-changing success. For more on the need for these co-ops, see this article of ours:  http://www.merrifield.com/articles/2_25.asp.

b.       After reading as much as you can on CoLinx, you might still not understand that as a limited liability corporation it can be set up by and/or used by competitors without any concerns of anti-trust lawsuits. There are two specific laws that were passed in the late ‘80s/earlier ‘90s that specifically allows this type of co-operative.

c.       This model is different from a “master wholesaler” model in several ways. The factory co-op members own the inventory in CoLinx’ warehouses and when stuff is shipped by CoLinx the factories do the billing and own the receivables. CoLinx’s balance sheet has no assets and no liabilities; data is returned to the member companies daily and “profits” are returned to the shareholders monthly! CoLinx does not market to the distributors; this activity is continued to be done by each factory. And, when distributors order from CoLinx at the general ordering site (ptplace.com) each factory controls what each distributor can see and do within each brand-name store/door on the umbrella, mall site.  

 

D.      How can independent distribution channels better use master distribution centers (MDC)?

 

a.       Big chains often have master-stocking or hub-warehouses that replenish smaller locations with goods that are best bought in straight truckloads or super slow-moving items that can only turn if many locations draw on them. Independent master (or pure) wholesalers that only sell to distributors, dealers or retailers, but not to the end-user exist in a number of channels. The big question is: when and how might a dealer buy everything, or at least as much as possible, from an (independent) MDC on an automatic, as-quick-as-possible basis to get the high turns and high fill-rates that Wal-Mart stores get from their MDCs since pioneering “quick response” in the mid-‘80s? I’m up to my hip boots in a solution to this opportunity in one particular channel.

b.       Perhaps the most progressive, independent, MDC business in the US is Dot Foods which operates in the foodservice channel. Dot’s total value proposition has become so apparent that Sysco, a $36B distributor in the same channel, is in the midst of creating up to 9 captive MDCs to feed their many operating companies on a continuous replenishment basis. If Sysco is going to run trainloads of frozen French fries through their MDCs and not let its “operating companies” buy truckloads direct as they always have in the past, what do they know about total procurement costs, turn-earn and fill-rate economics at the DC level that all distributors (and manufacturers) that are doing LTL shipments together don’t know?

c.       For more on this topic, see the following documents:

http://www.merrifield.com/articles/2_22.asp

http://www.merrifield.com/articles/2_23.asp

http://www.merrifield.com/articles/2_24.asp

http://www.merrifield.com/articles/1_15%20fillrates.asp

 

E.       WikiEconomics and the Future of ERP System Decisions.

 

a.       A tale of 4 distributors: I have four different clients ranging in size from $300MM to $800MM in annual sales. One of them did a fast-install of SAP’s Wholesale distribution package and is very pleased with their ongoing ROI. (How? Isn’t SAP “too big, too complex, too expensive”?) A second one, is stuck on a tier one ERP system that is working sensationally for them, but if they could do it all over again (and they won’t) they would be on SAP. Why? A third is using a niche, channel-specialist ERP solution, but the solution provider has been bought by a consolidator backed by private equity money. They think their system will become an “orphan”, and they will be forced to go to some new consolidated ERP platform solution. What should they do? And, a fourth is still on their home-grown, total-hairball-system that does the job for the lowest annual cost, but someday they will have to make a change too. I’m not the guy to determine what specific system is better than another for a given distributor in a given channel, but I can ask dumb questions about software trends and ERP consolidators (at least from a strategic and financial-imperative viewpoint).

b.       Some big trends in software are: service oriented architecture (SOA) which in turn makes Software as a (web) Service (SaaS) something to think about; and the on-going evolution of the open software “stack” vs. Microsoft’s proprietary stack; vs. SAP’s opening up 30,000 APIs (application program interfaces) to an exploding number of independent software developers who are working on “composite applications” for SAPs user base.

c.       Some big trends in how we will all create new value in the next 5 to 10 years will involve: inter-company supply chain connectivity to support supply chain value creation opportunities; and collaborative software for networked companies and individuals to use as a way of life. In the newly released book, WikiEconomics, the authors point out that the combination of: a global outsourced economy, the networked generation (12 - 20+) and the collaborative software capabilities that are emerging all add up to a revolution. I think they are right, although we all have maybe 2-3 years to figure it out. To that end, I’m fooling around with “collaborative spaces” at a web service company at www.near-time.com.

d.       So, look for more on these related subjects in the weeks to come.

 

 

That’s enough for this week. Thanks to you that have skimmed through to this point.

 

Bruce 

 

bruce@merrifield.com

 

919/933-7474