Exhibit 55




Introductory Notes:

As you skim through the excerpts from four of my publications since 1990, be aware of not only the “how-to” ideas, but the assumptions behind my thinking and rephrase those as your own questions using some format like: “Do I really believe that ‘x’ is working or will happen, because of assumptions ‘y’ and ‘z’?” Write down all of your operating conclusions, the underlying assumptions and the related questions that they will in turn raise. Then, live into the questions for awhile; don’t rush to judgment and risk reaching the same old habitual, reflexive conclusions.   


The current US downturn (7-1-08) will, IMHO, be like no other that we have had in our lifetime. It will take hard, fresh thinking and action steps to get through this one better than the average competitor. Think about your questions for awhile. Live into them. For more on “questionating to innovate” see exhibit 40 http://www.merrifield.com/exhibits/Ex40.pdf and article 1.20 http://www.merrifield.com/articles/1_20.asp at www.merrifield.com.  


I. From Distribution Channel Commentary #103(Jan.’08)




How’s the economy hitting your business right now?


Most of you may have already dusted off the curriculum for “Downturn Tactics 101.” That’s where you implement across the board spending-freezes or cuts. Close or consolidate a few losing branches or sales territories. And, postpone any discretionary spending or proactive investing until the downturn blows by.


But, what if our channel downturn is like housing, too deep and prolonged with too much industry capacity throughout the supply chain? Or, we want to work smarter, not harder than the Downturn 101 crowd and make more money? Shouldn’t we step up to the curriculum for: “Downsize, Upgrade, Refocus and Renew 201?” Or, we could subscribe to the design department’s cognate: “Simply and Amplify 202.”


At this level of thinking, clever managers don’t just rank by (net present) profitability value the key elements of the business: people, customers (by profitability contribution, not margin dollars) and suppliers. They weed the bottom ones to free up resource energy and payroll dollars to refocus on all of the winning elements that (who) have proven breakthrough or breakout potential (roughly the top 2 to 10%). And, then finally apply a total team, innovation obsession on those few winning elements.


Why the tight, intense focus on a small percent of the people, customers and suppliers? Here are some assumptions which you are free to challenge with your own counter theories:


·          10% of the employees in a selling/service organization will make 80% + of the new things happen (the other 90% can then work hard to importantly maintain the new streams of profits).

·          Less than 5% of the potential customer base will generate 80% of the new profit growth in the next five years for some supplier (why not us?).

·          Less than 3% of all mature businesses are perpetual innovators. Who are those cats amongst the supplier pool? Work with them to co-create the next supply chain value proposition for the best target customers. But, you must have a track record of being an innovator or at least willing to allocate strategic, co-investment resources upfront with a win-win, share the costs and the gains attitude.


All managers must be “Trim-Tab” oriented to effectively hyper-focus on the right, best:


·          5 core accounts per customer niche to systematically sell more to the core;

·          5 target accounts to crack and partner the high growth gazelles; and the

·          5 biggest loser accounts to turn 80% of this lead into gold???


What’s a trim-tab? It’s a small rudder on a rudder of either a ship or a plane. If the captain of a huge tanker moves the trim tab with little effort, the trim tab then builds a low pressure that pulls the rudder around which allows the craft to be controlled. To be a trim-tab manager we have to always be asking ourselves: how can I achieve the most profit growth for the least amount of effort in a way that moves us towards our best strategic vision? In a world of commodity products with customer bases in which 95% are not big or innovative, it comes down to “triple nickel (5-5-5) marketing.


For more on “triple nickel marketing” check out our exhibit at the link below or call us for an audit on how to zero in on these accounts and what strategies to pursue for them: http://www.merrifield.com/exhibits/Ex44555kit.pdf. All of this trim-tab stuff is in our “High Performance Distribution Ideas for All” DVD-training program (more in the center of our homepage at http://www.merrifield.com).


If we aren’t happy with trim-tab profits which run 2-4 times what average profits are for a given industry, then perhaps we should think about deconstructing our current mix of business into two or more “strategic business units” (SBUs) to find a “new growth business model” for which there are no other competitors. Think of “Blue Ocean” (google it) paragons like:


·          Southwest Airlines that was the first and only airline to work a city pair where the competition was drive yourself or take the bus.

·          Cirque Soleil that invented a circus-like entertainment concept that didn’t have any animals.

·          Fastenal which pioneered two-step, convenient/emergency buying distribution of fasteners to small towns (2000+ and growing in North America). FAST has grown earnings at a 30% compounded growth rate over the past 20 years without any acquisitions or external capital raising while returning average returns on capital well over 20%.


This type of thinking requires stepping up to “New Business Models 401” for which outside assistance from people who have seen lots of different business models in lots of different (distribution channel) industries would be a help. The transformational future for most businesses already exists in pieces and parts that are in other places. How do you, for example, take:


·          A Software-as-a-Service ERP solution

·          Add to it built in VMI, barcoding and e-commerce applications

·          Apply the replenishment economics and partnering of the drug wholesalers to the retail pharmacists

·          Mix in the local entrepreneurial energy of a franchisee

·          Apply the “whole-tail” pricing of WWG, FAST and MSM


II. From an article entitled: “Different Tactics for a Different Type of Downturn” (2001) which focuses on the measurable, financial “upgrade” improvement room that 90% of distributors have.


Yes!  Here are some reality-check statistics followed by some tough questions for the 90 percent of all distributors that aren’t in the top 10-percentile, financial performer category.


IDA's "2000 Profit Report" indictment:

In 1999, before the current recession hit, the median IDA distributor had gross margins of 24.8 percent, a profit before tax margin of 1.6 percent and a pre-tax return on net worth of 10.6 percent. The top 10-percentile companies, 14 out of 142 firms reporting, had the following average statistics: 32 percent gross margins, 7.7 percent PBT and 61.5 percent pre-tax return on net worth (6X THE MEDIAN!). The median distributor had $8 million in sales, the top 10 percent had $11 million, a sales volume difference that cannot account for five to six times better profitability rates!


What could the top 10 percent be doing differently?

1.       They are obviously “selling higher” with a 32 percent gross margin rate which would suggest that they have figured out how to measure, achieve, sell and get paid for basic service brilliance while most of the other 90 percent haven’t. The rest appear to be price-takers. Neither they nor their customers are convinced that they have a better total service value to offer at a higher comparative price than a mediocre service competitor.

2.       Perhaps the rest are still making 20 to 70 errors per 1000 line items processed in the warehouse which would give them higher operating costs, lower service value and lower morale. Remember Phil Crosby’s “Quality is Free” book from 1979? He estimated that the average service firm spent 40 percent of the total payroll cost on “non-compliance” activities, a euphemism for mistakes. The top 10 percent have probably figured out how to achieve do-it-right-the-first-time economics.

3.       The top 10 percent can’t be selling big, money-losing contracts at low margins to have a 32 percent average gross margin. Why haven’t the bottom 90 percent figured out how to measure customer profitability and then have the courage to tell losing customers that the relationship must be win-win (profitable to the company) or the customer must leave to paralyze the other 90 percent of the competitors who don’t know any better? Better to lay off the least productive employees in parallel with driving away losing volume activity. Then, a smaller, better executing and more profitable business can serve as a platform for the right kind of growth. Be everything to somebody instead of selling a little bit of everything to everybody.

4.       A company can’t achieve, sell and get paid for distinctive service excellence if all the employees don’t have their hearts, minds and wallets wired into the high performance cause.


III. From article # 1.9: “Tough Times are Just Beginning” (2002)




Shall we play safe and die slowly in the long run, because we aren’t fundamentally changing in tune with the market place, but rather just cutting back the oats on the same old plow horse and process? Or, should we play to win and reframe our actions to not only survive the downturn, but shift to a high performance path?


Many CEOs have already chosen the first path by battening down the hatches to ride out the storm, in hopes of continuing business as usual with an upturn. The sequential step drill is to:

·          cut all discretionary expenses

·          freeze wages

·          then cut wages across the board perhaps progressively so, with high income players taking a bigger percent cut than the lowest

·          lay off people in proportion to the decline in sales with the weakest ones going first

·          then, hold on until better economic conditions arrive in one to two quarters.


There are three main problems with these simple survival solutions:


1.       Many managers never fully confess their sins of expansion and diversion committed during the good times, so they don't shape up or shut down some of their biggest losing, pet projects (and customers). We need to be able to believe that "Volume is vanity, profit is sanity.” And, we need to downsize all losing elements of our business to refocus and revitalize all of the top 5 to 10% of our remaining elements: employees, customers, suppliers, locations. Less is more; build on strengths instead of trying to turnaround weaknesses or chronic losers.

2.       Cutting back oats for the corporate horse during a downturn does not ask the big question; why was the company such a poor performer before the slump? If the company was a resource trap before the downturn, why starve it now to try to get back to minimal performance in the next up cycle?

3.       Will a hibernation strategy even get a resource-trap company back to bare existence in the next upturn? More companies fail after economic slumps are over than during them because they are so financially weakened and demoralized from hibernation treatment. They can not keep their best employees, customers and suppliers from leaving for better, stronger, faster expanding competitors.

ADDED INSERT(7-1-08) The downturn of 2008 is unlike any that we have had since 1929. A global credit bubble, which in turn begat many other asset bubbles, including housing in the US, is unwinding. Some industries tied into housing or domestic consumer spending are looking at an unusually deep and prolonged downturn. Holding our breath for one or two quarters isn’t going to suffice. The supply capacity for many industries will have to be radically downsized and restructured.




If we don't like the implications of the three problems above, then there is an alternative: the hit-bottom, sober-up and reinvent the company choice. We can admit that we made past mistakes that we can no longer feed and shape them up or out now! We can assume that our unspoken operating assumptions were giving us poor results before the downturn. We need to articulate these assumptions, then discuss them in contrast to proven, high performance success assumptions and finally make choices and changes. Without admitting our past mistakes or surfacing and challenging our flawed assumptions we can't be open to considering and adopting new ones.


We must also admit that we can't make turnaround tactics or renewal programs work unless all employees are part of the solutions. At low performing distributors, the front-line employees are unaware, uneducated parts of the problem. How will we educate all employees about many things affordably and continually?


Making the big confessions above is actually the easy part; successfully executing a turnaround renewal effort is tough. The total effort typically breaks into two inter-related parts, weeding and feeding. Companies need to rank all of the vital elements of their business: niches of customers by strategic importance, customers within niches by profitability, employees by net productivity, branches by viability, and suppliers by importance for target customer niches. We must then manage the extremes; shape up or move out the bottom percentiles of each element group in order to refocus on and feed the top 10% that are more than 50%+ of the historic and future strength of the company.


The prioritizing of customer niches by strategic importance is critical to the renewal plan. We can't just downsize and upgrade elements, we must also be re-focusing and re-directing ourselves towards niches of customers in which we can become a dominant #1 with 50% or more share of the “profit pool” by distribution center region. Because both manufacturing marketing efforts and distributors have been historically product and volume driven, it isn't easy to conclude that selling everything to the best, growing customers within one niche at a time is the best way for growing both faster and more profitably. But it is!


IV. From Article 2.4: STRATEGIES FOR A DOWNTURNING ECONOMY - OCTOBER 1990 (This one has some more how-to methods in it).


The U.S. economy has been in a mild recession for all of 1990, and now it is starting to slide deeper and faster. How deep and long will it go is a guess. Given how much personal, corporate, and government debt that is outstanding, it would be wise to have contingency plans for mild, stiff, and heavy scenarios.


Most firms can survive in good times, but tough times often dramatically separate the well-managed, positioned and opportunistic firms from the weak. In downturns, strong firms can actually grow sales, profits and market share by filling the vacuums left by the radically retrenching weak firms; consider how Delta Airlines has been feasting on Eastern. The weak do not technically get in trouble in bad times, they plant the seeds for disaster in the good times by: overextending themselves while going for unfocused volume financed by debt instead of retained earnings; or by harvesting the business instead of reinvesting to create sound and strategically dominant firms.


Besides watching strong firms feeding on weak ones in the current downturn some strategic guidelines follow for which there is still time to preventatively practice to some degree.


1.       The average firm should sketch out scenarios for a drop in volume and margins over the next 12-18 months for three levels - for example, 5, 10, and 15%. Because distribution firms have a lot of variable costs and assets, it is theoretically possible to downsize cost structure and asset investment in proportion to margin decline. From a timing viewpoint, too many firms wait for the downturn and then reactively slash expenses and investment across the board. It is better to anticipate declines and downsize concurrently and strategically. Don't cut across the board, but prune the losing locations, product lines, customer segments, and people to feed and maintain the 20% that generate 120% or more of the value. Best firms weed their gardens continually, but many need a downturn to stop wishful thinking and swallow pride.

2.       Remember to maximize cashflow and ignore accounting "profits." To preserve working capital to pay bills and pay down debt we need cash. If firms do close poor branches; write-off the 50% of receivables past 90 days that won't be collected; ship back or write-off the inventory that hasn't been requested in the last year; etc.; these measures may generate huge accounting losses, but they all either generate cash in hand or allow a firm to get a check from the government on a tax-loss, carry-back basis. Don't report fictitious profits and pay taxes which is cash flowing out of the company.

3.       Many managers may resist doing steps one and two because they don't want to admit past sins so visibly, but the stated excuse for delaying and tempering cuts is "we don't want to spook employees and bankers." In life the sooner we face the pain, the less it will be; delaying action will just make the cost and trauma greater. It is best to confess our sins, state our economic forecast and plan in a way that we can confidently see light at the end of the tunnel. Most bankers and employees will be relieved and delighted to assist in the plan. They know the news on the economy; they feel the daily pulse of slowing business; they see or sense the deadwood, the fat, the underwater projects around the firm; and they wonder why management doesn't do what it should.

4.       If anticipatory, strategic pruning is necessary, it is best to have an articulated forecast, budget, and action plan, and then do all the cuts quickly. Like removing the Band-Aid, a quick, big tug hurts less than the cumulative anguish and pain of a series of tiny tugs.

5.         For asset management, inventory investment often swells in spite of best intentions for several reasons.

a.               In a declining economy, lead times from manufacturers often drop more quickly than inventory computer models can detect them on their own. Inventory will flow into the warehouse sooner unless the problem is anticipated and reorder point calculations are manually changed.

b.               Demand from different customer segments will often drop more quickly than inventory software can detect it. The replenishment reports instruct buyers to buy more, based on historical demand. Again, the software must be manually overridden to lower reorder quantities and cumulative inventory investment budgets.

c.               Suppliers are quick to offer deals which include discounts and dating; these deals don't seem to threaten cashflow until it becomes apparent that an extra two months of supply is six months because demand is down. And the special price isn't a deal if all competitors loaded up on the same deal and are passing the savings on to the market. Nibble at these offerings and match competitions' prices to your core customers.

6.         Days outstanding for receivables will lengthen during downturns, but this general statistic masks several sub-plots.

a.               Well managed firms are good for the cash and most will continue to discount. If a few of them are tempted to stretch suppliers, an on-going, disciplined collection system will nudge them back into prompt pay.

b.               Loose, harvested, or overextended firms will be squeezed and will try to pass the pressure on to their suppliers. For this group, a firm must make a select number of judgment calls. List the customers that have been: historically profitable; a good strategic fit with what you are selling; and somewhat to significantly faithful. Remove from the list any customers that you have doubts about their ability to survive the downturn. And then budget how much financing you are willing to extend and on what terms. By proactively offering some leeway and advice on how to work out of their situation, if appropriate, negatives can be turned into long-term positives. But, don't finance all of this category when they are discovered to be past 60 days.

c.               A third group of customers will have already been slow-paying and a downturn may put them into serious trouble. If these accounts have weak and untruthful management and are not number one or a strong number two within a focused and viable niche in their market, cut losses now to avoid bigger losses and run-arounds later.

7.         Can firms sell or market their way though downturns? It depends. There are several strategies that can work:

a.               A strong, focused firm can target weak head-to-head competitors that are imploding from past sins as in the Delta Airline example mentioned above.

b.               Alternative channels of distribution with less service and lower prices can strip away business from the full-service, higher-priced competitors who can't figure how to unbundle and sell services on a cost-plus basis. For example, small businesses have been switching from local office supply dealers to mail-order houses like Quill or category killer stores.

c.               Some customers can be persuaded to trade-down from high- priced, high-quality goods and services to minimum requirement goods and services.

d.               Promoting lower inventory investment solutions can gain volume, because customers will be looking for cash flow savings. The supplier may have to cut the price creatively by stocking more and delivering smaller quantities more often; if it makes strategic sense, do it.

8.         Selling harder with me-too products, undifferentiated service, and sharper prices or terms backfires. Customers cannot buy more if their demand for product is shrinking. They cannot take care of whining existing suppliers let alone another. If sharper price offerings make them think, they usually give the entrenched supplier last look. If the competitor passes, the aggressor captures new volume with margins that will not cover the cost of taking care of the customer. Volume increases but profits drop, and inventory and receivables grow. Financing empty volume with debt is a disastrous long-term formula.

9.         The best way to grow in good or bad times is to retain the profitable accounts at a greater rate than the competition by not making service mistakes or dropping service levels significantly because of a credit crunch. Remember also that "grow" should apply to profits and return on investment which today is often very independent from growing sales volume. If given last look at a piece of business which will become unprofitable, pass to reinvest resources in other potential profitable business or downsize to better focus on what profitably remains.


We all would like a generous economy, but tough times favor the best-run and strategically opportunistic firms who proactively anticipate economic events. Use these guidelines to turn a negative economic scenario into a positive one or dramatically reduce the losses that could occur.



© Merrifield Consulting Group, Inc., Exhibit 55