CHAPTER FOUR

PREPARE FOR (EMOTIONAL) RESISTANCE TO ALL THINGS LIPA

“Truth goes through three stages. First, it is ridiculed. Second it is violently opposed. Third it is accepted as self-evident.”    Arthur Schopenhauer

My short answer for how to - see, create and capture - hidden, supply-chain value for all stakeholders is to just take these LIPA-Management, Journey steps:

1.    Read “Islands of Profit in a Sea of Red Ink” (and discuss one chapter before each weekly management meeting to see how it starts to update and reshape unspoken operating success assumptions. Discussion tone and content will change! (YouTube Video Module 3, Slide 2)

2.    Do one to three of these measures in any order:

a.    Read this book.

b.    Schedule a Waypoint Analytics demo

c.     And/or, attend an APIC conference http://www.apicconference.com/APIC_conference.htm?page=APIC_registration.asp.  

3.    THEN, “Start The Journey”: one safe step at a time. And, you will get the same great results of the LIPA-Management, Power-Users mentioned in Chapter One!  

BUT: “TRUE-NEW” SOLUTIONS FACE A PATH OF GREAT RESISTANCE

Selling new ways of looking at the world (“paradigms”) has never been easy. In history, new “mental-models” for the world, which seem obvious today, weren’t instantly popular. Some famous examples:

·        Sail west to get east, because the earth is round. (A better, supply-chain proposal by Chris Columbus to his venture capitalist, King Ferdinand.)

·        The earth is the third rock from the sun, not the center of the heavens. (Boyhood pal of Galileo’s gets it, but has a conflict. He is now Pope Urban VIII with good job benefits linked to geocentrism. Solution: Galileo can burn or recant and live under house arrest for life.)

·        Evolution v. creationism. (Still some static in spite of 4.54 billion-year-old dirt as evidence.)

·        US slaves should be free according to our constitution. (Civil war losers did not all instantly buy into the new, “everyone-is-equal” paradigm.)

·        (100 years later) “Separate but equal” wasn’t. “Civil rights” re-start.    

·        (’23) Women should have the right to vote in the US. (Even though: “they will just vote for who their husbands tell them too”.)

·        (’69) Elite universities that benefit from public funds should admit women too. (Even though: “...we don’t have enough women’s bathrooms on this all male campus!”)  

Business innovations usually face similar tough roads to acceptance. Here are a few historical quotes:

·        “This ‘telephone’ has too many shortcomings… (it) is of no value to us.”   Western Union 1883

   “Radio has no future”.  Lord Kelvin 1897

   “The horse is here to stay…the automobile has reached the limit of its development”…

Scientific American: January, 1909

   “There is no reason for any individual to have a computer in their home.”

Ken Olsen, founder of Digital Equipment: 1977

   “The sales force won’t stand for it” (i.e., the small-customer/order case solution in Ch. 3)

Anonymous paper-distributor executive at my 1979 Workshop in Ch. 3.  

 

Even venture capitalists - who are paid well to see the future first and invest in the startups to get there - have low batting averages. Bessemer Ventures Partners’ record:

·        Invested successfully in: Staples, Skype, etc.

·        Passed on - Intel, Apple, FedEx, PayPal, eBay and Google: all more or less crazy ideas at the time.

·        And, they had plenty of other losing investments in startups that flamed out ignominiously.

 

The entrepreneurs running these new ventures often don’t even know what they don’t know. Consider these Google valuation facts.

·        In ’98, Google’s two founders tried to sell out for $1 million to Yahoo, the search king at the time. But, Yahoo wouldn’t go past $800,000. With hindsight: what were both parties thinking!

·        Four years later (in ’02), Yahoo offered $3 billion, but the Google boys were wiser then (?) and declined.

·        Google went public at an initial market cap valuation in ’04 of $150 billion.

·        GOOG’s market cap on 8/6/13 was $301.16B.

 

LIPA Management isn’t as big of a True-New as the history lessons above. Customer profitability cases and tool development have been evolving with success stories for 41+ years (Ch. 3). Still:

·        The revelation that 80% of the active customers are not profitable starring some big, “best accounts” as biggest losers will spark anxieties and pushback.

·        You should have a company-wide “adoption curve” strategy for getting everyone behind the insights and opportunities that LIPA enables.

·        Most employees will need some mix of – educational, face-saving and economic assurance – to help them get past their own Conceive – Believe - Achieve (CBA) hurdle.

ARE YOUR CURRENT BIG PLANS:  FAKE-NEW DISTRACTIONS or TRUE-NEW?

If most of the management team likes a “new” idea, then it isn’t new. It’s a fine-tuning of the past which taps into everyone’s existing mental models (beliefs, pattern-recognitions, methods, skills, habits and comfort zone). It’s: old wine in new bottles; the same play disguised in new clothes with an extra, new wrinkle. People can instantly get it (“conceive”) and “believe” that it could work as it did in the past with hope for: “even better”! “Achieve” is no great concern, because past experience instructs us on how to take it to the “next level”.   

Fine-tuning is good as long as there is true, worthwhile, incremental-efficiency ROIs instead of diminishing returns. Should we re-double our efforts to go from six-sigma to seven? How much will customers notice the infinitesimal difference and then reward it? Is obsessing on tired, “best practices” a distraction from True-New opportunities with much bigger upside gains? If we aren’t the first to see and exploit changes, then someone else will at our expense. If we are too busy optimizing furniture arrangements on the deck of our ship, how can we see the on-coming iceberg and do something about it?

Most have heard the - “definition of insanity” - quote: “Doing the same thing with the expectation of getting different (better) results”. But, a corollary is my belief that: doing the same thing – in a changing environment – will guarantee worse results as competitors see and adapt to the change first or our boat sinks.

LIPA Management Journey-Ware is sufficiently True-New to elicit the normal chronological sequence of reactions: puzzlement, ridicule, angry opposition and acceptance.     

If you want to introduce LIPA Management to your company, you will need “New” answers for all of the “New” objections and questions that are influenced by underlying, negative emotions. To systematically review all possible objections, I have included two exercises for helping people over their CBA hurdle:

·        Below: A composite case study with a summary of why a CEO concluded: NO, we will STALL on doing any further exploration of “customer profitability” results.

·        Ch. 5: An exhaustive INDEX of “New” concerns followed by an equally exhaustive Review of New Answers which LIPA-Management Champs must know.    

CASE: CEO REJECTS “TURNING BIG, LOSING CUSTOMERS INTO WINNERS”

THE PITCH: Here is what I roughly said to the top three executives of a distributor after working with the CFO (a closet LIPA-Believer) on preparatory analysis:  

“The big, initial shocks of this customer profitability report are at the extremes: the very top and bottom. Here is a “twin study” we (the CFO and I) did in advance for two accounts from the same niche. Besides having similar financial factors – sales, GM$s, GM% – they buy the same mix of products. But, their buying patterns and cost for us to serve them vary widely, so one is an extreme winner while the other is a big loser.

·        The profitable twin is yielding a 10% net profit margin (as a percent of sales) with an $800 average order size.

·        The losing twin has a minus (8%) net LOSS (percent of sales) with an $80 average order size. The losing twin is generating 10 times the order-activity costs for both us and them for the same annual sales volume as the profitable twin.

This raises several questions to investigate:

o   How do these twins differ internally in their buying – assumptions, replenishment systems and disciplines – to yield such different average order sizes and CTS levels?

o   Why not invite ourselves to do a top-management, walk-through audit of both accounts to see how our – product, paperwork and service points of contact – are working. Our honest goal will be to look for “incremental ways” we can fine-tune what we are doing together in order to save them some potential hidden costs and improve their uptime productivity.   

o   Which twin will turn out to be achieving the best overall buying economics? For example, we discovered – by doing a deeper analysis – that the unprofitable twin has repetitive, rush orders for the same $1 widget almost every week. What is behind that buying pattern? What do you and associates know about the SKU and the customer that allows you to make a good guess about what might be going on?     

§  We know we are both getting killed on all paperwork costs for each $1 invoice.

§  Paperwork costs for both of us had been unmeasured until now. I think we can assume that their paperwork costs are roughly equal to ours. What we both thought was a negligible cost is unnecessarily big. We could give them 52 widgets for free now and save $5100 in annual fulfillment costs.  

§  But, what might be the customer’s downtime costs while waiting for the widget?

§  And, if they can’t do work on-time for lack of the widget, then will their customers be unhappy with delayed service/delivery? What are the downstream, unhappy customer costs for these emergency buys?

o   If we dig into the details of what and how these two are buying, will we (no doubt) discover some new insights about these two customers’ best and worst buying practices? Couldn’t best and unintentional worst buying practices, then re-inform how we sell the rest of the big customers: at least in the niche the Twins are in?

Our bigger, learning objective will be to find ways that either or both of us might tweak our buy-sell activities to get BIG reductions in hidden buy AND sell activity costs. If we could transform 10 big losing customers (per branch) with a combined estimated losses of ($100K) to a positive, profit of say $30K (and grow those customers’ total productivity and profits AND sales) that would be a BIG $130K-plus swing at the bottom line.

What do you think about this line of thinking and proposed experimentation?”   

THE STALL RESPONSE: The CEO and the VP of Sales were initially stunned and silent. The VP of Sales then admitted that he was so shocked and distracted by seeing that a few, large, “most prestigious” accounts were the biggest losers, he didn’t hear all of what I was proposing.

(Remember: people have to hear new – ideas, terms and math – multiple times to start to “get it”. We must be like algebra teachers and provide five or more customer case studies (variations on one concept) along with the CTS math implications to be more successful. )

Having seen this reaction before, I didn’t try to rationally convince them any further on my True-New ideas. (The CFO and I were hoping to get an agreement to explore further down the Customer-Profitability Path). We, instead, just started listing all of the emotional feelings and questions that would come up from other members of the team: notably reps! If the CEO could have been honest with his feelings and ego needs, he might have – after some reflection – written the following summary note to me, WHICH INCLUDES BOTH CONSCIOUS STATEMENTS AND UNCONSCIOUS EMOTIONS:  

A Composite, Artificially Honest-and-Self-Reflecting Response:  

“Bruce,   

After thinking through our meeting, my biggest gut reaction to the initial customer profitability report (CTS model) and therefore your proposal is that they are hugely flawed. The CTS allocations are subject to lots of cost assumptions that cannot perfectly fit all customers. All of our big customers buy items, for example, for which they are the only customer.

(LATENT THOUGHTS:  I can’t “conceive” of how best accounts are big losers. My composite, Old-Belief-System instantly, emotionally rejects the math that I am seeing. I’m not yet believing. If I can find imperfections in the new model, then can’t we throw it out and go back to the old one – financial numbers  – for and in which we can pretend that CTS isn’t a factor at all?) 

My feelings so overwhelm my logic that I cannot begin to think about how we can tell big customers that they have to buy differently than how they currently want to. No good salesman wants to contradict a customer: (no achieving confidence yet).

If we tell a customer that they really aren’t buying smart, they could be insulted and switch volume to eager competitors. Since our competitors are all pursuing these big losers, everyone in the channel – customers, competitors, suppliers and my employees – will think I’m crazy to try to confront and change big losers. And, I can’t begin to think what I might tell our reps who are working hard for these accounts to earn big commissions that would be at risk.

This brings in my financial management beliefs. If we inadvertently drive away business, then the lost margin dollars will hit my bottom line right away. All of our operational costs are in the short-term, fixed. We would then have to allocate more of the same fixed overhead to the remaining customers making them all less profitable and tipping some into the “losers” column. Couldn’t this be the beginning of a downward spiral?

Conversely, if we get one more order with any GM$s in it, we can take care of it without any more overtime. Won’t a good chunk of any new, incremental GM$, therefore, drop to the profit line? I’ve always thought every dollar of GM is a good one, so every active customer is good for the profit line. A past slogan of this company was: “there is no customer who is too small”. We recently did a formal program to sell one-stop-shop supplies to a category of small customers who all appear now to be sales and GM$ winners, but net-profit losers.

I guess this is “economies of scale” thinking. Get more sales to buy better and keep our people busier processing more GM$ per person and get more GM$ per truck run. I guess I’m not fully understanding your assertions that:

o   80% of our operational costs are purely variable and dynamically re-deployable or downsize-able.

o   Our “standard service model” cost structure exceeds the average GM$/order for the 50%+ of our customers that are small-customer/small order companies run by “self-employed owners who are growing nowhere”.

(BRUCE’S NOTE TO SELF:  The CFO and I had gotten so fluent in our CTS math, we assumed the other two would get these “assertions” with one pass: at least intuitively. Wrong assumption: we needed to do 5 or more case study repetitions. Then again, CEOs can have short attention spans and don’t want to be taught to. How do we teach them diplomatically? It depends: each executive is different.)

(MORE LATENT CEO THOUGHTS: Then, there are my ego issues about what I’m seeing and feeling. I don’t like the idea of confessing that I’ve been misleading my employees (for years) to pursue and serve some margin dollars that have even higher, activity-costs to serve. It doesn’t help that no matter how we tweak the allocations in the CTS model, the super winners and losers always remain in the same group).

(MORE LATENT THOUGHTS: Everyone is going to expect me to have answers to all of the NEW questions that these NEW ranking reports raise, and I don’t have them. I’m a beginner in this new LIPA World. I’m used to being the instant, decisive expert for most questions that comes from applying my years of experience in this channel. It’s hard for me to say: “Gee, I don’t know, but let’s try something new that goes against our tried-and-true beliefs/practices anyway.” My overall defensive reflex is to come up with some sort of short, dismissing rationalization – a stall statement – that will allow us to put this idea on the back burner while I comfort zone it: perhaps for a long time).

Because your proposal is based on imprecise CTS models and we already have too many projects underway (FAKE NEW?), we have decided to pass on doing anything in the customer profitability area for now.  

Sincerely……  Joe Stall-It

THE CASE DISCUSSION QUESTIONS

Before we talk about Joe’s response and the CFO’s possible on-going persuasion plans with Joe, how sold are the reader and potential LIPA team members on either THE PITCH by the CFO and me? Or, are YOU and other involved team members more towards Joe’s we-don’t-buy-it, end of the spectrum? To be honest with upfront gut feelings and trying to explain why is important.

1.    Is Joe Stall-It making the right decision to keep fine-tuning the past? Is doing more investigation into LIPA and “either/or” choice with whatever other proactive initiatives Joe believes are underway? How fast or slow should the executives go on “and/both” more LIPA learning?

2.    If you were the CFO, what type of education strategy would you pursue with both the CEO and the VP of sales? How can you get fluent with all of the “New” answers you must have for ‘New” concerns? (See Chapter 5: THE COMPLETE INDEX OF LIPA CONCERNS + ANSWERS.)

3.    Knowing that most concerns are also infused with fear of the unknown, how can you defuse the fears first, so people can then be open and free to see the logic of LIPA opportunities?

4.    What alternative “STALLS” might a LIPA Champion run into within their organization? How best to respond to them?

CHAPTER POST-SCRIPT: Here are three categories of CEO Stall Statements I have gotten from executives in response to the question:  “Are you doing anything presently with Customer Profitability Analysis?”

I’ve followed each one with some counter-points. The more exhaustive brick-by-brick index of concerns and answers is in Chapter 5.

STALL #1:  “We already have some sort of customer profitability analytics capability on the shelf. Our software vendor sold us the deluxe, analytics package in which I think we can do CPA. So, we don’t need another solution/name (“LIPA”) for the same thing. We just have to use whatever it is we were told we have. We aren’t investing in any more shelf-ware!”  We need to just keep working on what we already are doing and our current TO DO lists.

Short response:  (1) “Analytics” is not (2) “Customer Profitability Analytics: CPA”. CPA is not (3) “Line Item Profit Analytics: LIPA”. And, LIPA by itself is not (4) “LIPA Management Journey-Ware” accompanied with educational support (this book; APIC community; and my 450+ YouTube clips).

The upside potential of the LIPA journey is huge and not comprehended by this response. The shelf-ware group needs to spend a few hours to find out what their shelf-ware can do. Then, if the upside potential of LIPA Management is understood to be huge, they can request a team demo of LIPA-ware and/or attend an APIC Conference.

BUT, when every department already has their ambitious TO DO LISTS filled with Fake-New efficiency programs, how does something with 10X or more upside get put at the top of the list? If folks can’t get over their Conceive-Believe-Achieve hurdle, then they can’t Conceive/Belief the 10X+. This is good news for the few distributors with ambition and the ability to reassess their old belief systems. Longer Response: YouTube Module 3, Slide 18; YouTube Module 3, Slide 19.

STALL #2: “We already are doing (or have done) that CPA stuff. (As in, we’ve checked that off the list without any assessment on the quality of any follow through. What’s your next idea? Is that all you’ve got?) Our finance department is the best. They crank out those rankings periodically in case any reps or branch managers want to do anything with them. Since some of our biggest, best customers show up as big losers, no one (including me) really knows what to believe. And, we don’t want to upset any reps, so we haven’t done much that I know of.

Short Response:  If you have confused “we’ve done that already” with being a Black-Belt-Nth-degree “supply-chain-math, custom-solution provider”, then keep reading! If we play golf one or two times a week during the summer, we could say: “we are already doing that game (just like the pros?)”. In comparison to the golf pros, the seasonal player is only similar by having: the same tools; the same 18 targets; and the same goal of minimizing strokes. Beginners often don’t know what they don’t know about the gaps between hacker and Jedi Master. How much upside is there with LIPA Management? Why it is desirable in more ways than we can imagine? And, how should we aspire to close the gap(s) between present and potential performance?    

STALL #3: “We did a customer-profitability report and acted on some of our small customers! We assigned some of them away from some reps to the house. Then, we sent the “minnow accounts” a letter informing them about new, minimum-sized orders. (So, we have already done CPA: see #2)

Short Response: This action sounds short on vision and implementation. Some questions:   

a.    Where was the cut-off for: still sales-rep worthy and small-account service division?

b.    Was there a “champion” for the new, small-account, profit-center with suitable KPIs?

c.     Were some of the targeted accounts quietly reassigned back to reps for comp benefit?

d.    Did inside reps enforce the new rules on their small-account friends who asked for a break?

e.    How will you prevent new, small customers from creeping into rep territories in the future?

f.     If you treated the losing, small accounts as a new profit center, how big a loss was turned into how big a profit?

g.    And, what about all of the other LIPA Management plays that can be run too?

CHAPTER SUMMARY

 

Most businesses can find infinite ways to continue to improve what they have always been doing. These initiatives will have diminishing returns and can be distractions from True-New opportunities. Every company has to strike a balance between fine-tuning and True-New programs.

 

But, True-New is not easily conceived, believed and then achieved by a critical mass of key team players. Any would-be LIPA Champion(s) are going to have to both defuse fears and re-educate old beliefs. The next chapter is designed to help you slay fears and promote true upside opportunities for all.