January 16, 2008 -
Distribution Channel Commentary (DCC) # 103
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TOPICS:
QUOTES
INSPIRATIONAL STUFF AT YOUTUBE.COM, ETC.
CANDIDATES TALK “CHANGE”; WE NEED TO WALK IT IN 2008
DOWNTURN TACTICS; NEXT-LEVEL TUNING; OR,
TRANSFORMATION?
PRIVATE LABEL, RACE-TO-THE-BOTTOM WINNERS AND LOSERS
QUOTES:
“Will the U.S. experience a soft landing or a hard
landing (recession)(?); a hard landing that will be severe and protracted….Will
the current financial markets crisis (liquidity and credit crunch) get worse or
better(?)....worse and the risk of a systemic financial crisis is rising.” Nouriel Roubini 1-11-08
“It’s Time For Change/Barack Obama 2008” (bumper
sticker)
“Innovation is actually easy…I hate benchmarking; it’s
stupid” Tom Peters http://youtube.com/watch?v-8AGTpu_i8sc
“Curry scores… this ballgame is over….the Tigers
(Trinity Texas) win…this might be the most miraculous play in all of college
history…I couldn’t count the laterals”
Jon Wiener (announcer who was calling this come-from-behind play that
started on Trinity’s 30 yard line with 2 seconds to go and had 15 laterals) http://youtube.com/watch?v=VrI52_2GaZI
“You can not be remarkable by following someone
else’s remarkable…what could the Four Seasons and Motel 6 possibly have in
common?...the thing that all (corporate winners) have in common is that they
have nothing in common…the leader is the leader precisely because they did
something remarkable which is now taken, so it is no longer remarkable when you
decide to do it.” Seth Godin in “Fast Company” Feb. 2003
Weed losing
elements (which means admitting mistakes; booking losses; shaping up or out
losing accounts; shrinking sales to then grow them anew) to simultaneously
redeploy (feed) quick, cheap experiments that point toward “remarkable”
value innovation possibilities for our best (new?) target customers. We will
not, otherwise, have the resources to do the “new”. Investing to imitate competitor(s)
is not “new” and costs money. Then, saying “me too” does not: win business away
from competitors customers or win higher prices from existing accounts. Being
distracted by what too many competitors are doing, is all cost and no return,
and it keeps us from figuring out who are best customers should be and what
their next level needs really are. DBM,
Jr.
INSPIRATIONAL STUFF AT YOUTUBE.COM, ETC.
I have become a big fan of youtube.com, especially
when I’m looking for a couple of minutes of inspirational viewing or teaching. I
remember watching Secretariat win the Belmont
by 31 lengths back in 1973 in a time of 2:24. No horse has come within 1.5
seconds of that time since. As a former track runner, I have never witnessed a
more dominating and courageous track performance by human or horse. And, we can
watch that race anytime we want at this link:
http://www.youtube.com/watch?v=xoFquax2F-k.
Where were you when Jayne Torvill and Christopher Dean
won the gold medal in the free, ice dancing event in the 1984 Winter Olympics
in Sarajevo?
Their exquisitely choreographed routine (by Dean) to Ravel’s Bolero earned,
for-the-first-and-only-time, across-the-board perfect scores for artistic
impression. As a fan, I was watching it live and
was stunned by the performance and couldn’t imagine how a judge could not give
them a perfect score, and then it happened. Wow! I’ve since watched their
routine numerous times at: http://youtube.com/watch?v=t2zbbN4OL98.
How about Doug Flutie’s game-ending and winning Hail
Mary touchdown pass that lifted BC past Miami
in 1984 and iced the Heisman for Flutie? http://www.youtube.com/watch?v=q3ykWbu2Gl0.
Or, Dwight Clark’s NFC Championship winning catch in
1982 to send Dwight, Joe Montana and the SF 49’rs to the Superbowl: http://www.youtube.com/watch?v=dYRHit3Mm6M.
How about Michael Jordan’s last professional shot in
’98 to win the game and his sixth NBA championship with the Chicago Bulls? Did
you remember that the shot was preceded by his making a steal and then hitting
a perfect swish with perfect form? See with slow motion and inspirational music
at this link: http://www.youtube.com/watch?v=-WULyz1-OQc.
Want to show a funny and/or motivating clip to a sales
force? Here are a couple: “A Few Good Expenses”
http://youtube.com/watch?v=o55DNWyw0HE.
“The speech” from Glengarry, Glen Ross by Alec Baldwin
could be a bit intimidating to some sales reps (if that is a problem?) and some
might be offended by some salty language. But, a cleaner, funnier version is
this one in which the head Elf tells the rest of Santa’s workers to get to
work: http://www.youtube.com/watch?v=Jamonno9xy4.
You will see in the right hand column a link to the Glengarry, Glen Ross speech
if you are interested.
Let me know if you find your own inspirational clips
at youtube.com!
CANDIDATES TALK “CHANGE”; WE NEED TO WALK IT IN 2008
Just before Iowans voted for the presidential
candidates, both Obama and “the economy” surged to the top of the polls, and
all the presidential candidates started talking about the need for “change” and
why they were the “change candidate”. None of their “changes”- except for Ron
Paul - have any realistic math behind them, nor could they survive the mangle
of congress, but for now it’s fun to pretend lots of free, no-pain change
delivered in sound bites could happen.
But, business is different. Management can lead real
innovative change to create real new streams of profits, although most preside
over fine-tuning the past comfortably within both their company and (mature)
industry group-think assumptions. And, with economic downturn necessity upon
us, what should we do? What level of innovation should we pursue as true
leaders?
KNOWING WHAT
TO DO, ISN’T EXECUTION; e.g. SUPPLY CHAIN TECHNOLOGY
Can we assume that: “we’re smart, we
will figure it out”? Knowing what the right things to do is a start, but it
isn’t doing it. Wal-Mart, for example, pioneered paperless, continuous replenishment
with its supply chain from ’83-88. K-Mart tried to imitate it from early ’90
on; failed; and went bankrupt. History concludes that when a new process
technology hits an industry like “continuous replenishment (aka: vendor managed
inventory; quick response; efficient consumer response) 80% of the players
never figure out how to do it and eventually go out of business for not
adapting. For every Wal-Mart
Supercenter that has
opened up, for example, two grocery stores on average have closed down, as Wal-Mart
has gone from zero to 35% of the national grocery store volume since 1990.
Why after 20+ years of continuous paperless
replenishment with barcoding from stem-to-stern in retail stores are most
locations within independent distribution channels still not doing VMI and
using barcodes throughout? And, after 10 years of internet interactivity, why
are so many independently owned channel-locations still vastly under using MyWebPage
interactivity for their customers who do lots of other personal functions on
the web including: paying parking tickets; buying movie tickets; booking
airline reservations; checking stocks; and buying from WW Grainger(WWG),
Fastenal(FAST) and MSC Industrial(MSM)?
In theory, an independent location distributor could
partner with a national competitor that could also be viewed as a de facto
master wholesale distributor using on-demand ERP software that has the “new”
supply chain technology (VMI, e-commerce) built right into it. This new model could radically reduce the: footprint;
inventory investment; cost; and complexity of the business, and it could
radically increase the fill-rates of both locally stocked goods as well as the
local, next-day availability of 5-10X more items stocked in the regional DC.
Small losing distributors could be reinvented. New locations in under-served
smaller towns and big city niches could become possible run by simple, local,
personally-connected people from the channel. The total economic performance
of such partnerships could outperform the under-one-roof performances of WWG,
FAST and MSC.
Sure “it’s weird”, but how else are you going to grow
and make a lot of money in tough times in commodity distribution channels. If
we do the stuff that everyone readily understands and is fearless about, it
isn’t “new”. It’s the same old industry stuff in different clothes and
try-harder fairy dust. Want me to help you reinvent your channel using the
ideas above? Just contact me.
WHAT’S OUR MANAGEMENT TEAM’S COLLECTIVE CHANGE
CAPACITY?
Whether it be transformational supply
chain technology or some other innovation, can we assume that the entire
management team is on the same wave length for change? Adoption-of-innovation
studies agree that there is a bell-shaped curve for open-mindedness to
personally-affecting ideas; all of the studies come close to the following
conclusions:
5%
are visionaries (first movers)
10%
are early adopters (fast followers)
35%
are early majority
35%
are late majority
15%
are “traditionalists” (laggards)
Which category would every member of the management
team put themselves and others anonymously? If 25% of the management team are “traditionalists” and are allowed to
play “devil’s advocate” to nitpick every new idea for not being perfect as a disguised
defense for maintaining the far-from-perfect status quo, can any change happen?
If out voted, will they cooperate in leading any change they don’t really
believe in?
A client was running his top 8 managers through most
of the 53 modules in our “High Performance Distribution Ideas For All” DVD-based
training program. He had, in retrospect, 2 “traditonalists” who were such
nit-pickers in the discussions that the CEO finally installed a new discussion
rule: no one was allowed to criticize a new/different idea from the video unless
they also had another positive idea for how to solve the topic/issue/current
under-performance at hand.
By the time that the group had gotten through the 12
modules on open-book management and the 10+ modules on segmenting customers by
“profit contribution” and serving them differently including solving the
small-order, losing-customer problem, both managers quit. They were long-term,
loyal employees who really knew the business and weren’t going to have anything
to do with the changes that the rest of the team was embracing. But, if important
change was going to happen, the quitters couldn’t be on the team; the parting
was a necessary evil for moving ahead with brilliant results, as things turned
out.
Even if the tension between visionaries and
traditionalists can be resolved, not every company associate has the same courage
for dealing with the failing forward that comes with change. Try this
experiment with a sales force dealing with unprofitable accounts:
- Give
each rep a ranking report of their accounts by “profit before interest and
tax – PBIT –contribution”. There will be very few
that make good money, a number that are mild losers and a few that are
huge losers, because they swamp the company with small orders that each
has less margin dollars in it than the cost of handling the order.
- Provide
some coaching on how they might go out and persuade/work with all of the
losing customers to order less often in a systematically larger order way
– and perhaps in greater volume – that is actually a win-win solution for
both sides.
- Then,
monitor and judge how brave and resourceful each rep is. There will be a
huge range, and most will not be able to do the job even with extra
incentives.
If we want to raise the courage to change quotient
for our company, we have to start:
- Hiring more people with the courage to change;
- Force others to leave for more static
organizations simply be putting in new open-book metrics, incentives and
responsibilities; and
- Overhauling our corporate culture “memes”
regarding change.
If you want to do some more
reading on these challenges, I can recommend the following web-based documents:
My
annotated slide show on the topic at this link:
http://www.merrifield.com/articles/SixCultureOfInnovationMemes.pdf.
Check out all of the articles
on Whole Foods at fastcompany.com, but especially this one: http://www.fastcompany.com/magazine/02/team1.html.
Find out that: every employee can look up what every other employee makes; new
hires don’t get hired unless a super-majority of the team they will work with
votes for them after their trial work period; and employee teams brainstorm and
implement ideas to increase customer satisfaction and sales/employee/hour; and
finally they vote as to which team members get what percent of the
productivity, gain-sharing pot. Sound scary? So, are the results that Whole
Foods has been racking up in a very mature, super cost-conscious grocery
channel.
DOWNTURN TACTICS; NEXT-LEVEL TUNING; OR,
TRANSFORMATION?
How’s the economy hitting your business right now? Are
you tied into the housing industry and dealing with innovating through a
collapse? Do you sell stuff into manufacturing plants that are still emigrating
to Asia or evaporating? Have you had a great
ride on the commercial construction bubble which is now starting to wind down?
Will it collapse too? Have you enjoyed huge inflationary mark up opportunities
with the ascent of steel, copper, etc. Have you been operating in the corn-belt
where now one-third of all of our domestic farmland output is headed towards ethanol
plants so that we can: 1) use more total energy making ethanol than we get from
it; and 2) crank global food inflation.
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.
And, 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
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
TO CREATE NEW, PROFITABLE,
DISTRIBUTION FORMATS IN ANY CHANNEL IN WHICH THERE IS A DECENT EMERGENCY/
CONVENIENCE STORE TYPE OF DEMAND (AS IN MOST CONTRACTOR SUPPLY CHANNELS).
More food for thought on business model re-thinking,
check out these documents (in order): http://merrifield.com/articles/BlueOceanIdeas.pdf
and then, http://merrifield.com/exhibits/Ex5410X10.pdf.
PRIVATE LABEL, RACE-TO-THE-BOTTOM WINNERS AND LOSERS.
Let’s see if we can “questionate” the following information
dots to come to some conclusions about the end-game for the private label boom
that has spread from consumer channels across many other industrial and
commercial distribution channels:
INTERESTING INFORMATION DOTS
:
- US
corporate earnings have risen by over 150% over the past 5 years while
domestic growth has been a fraction of that.
- During
the same time the flood of cheap labor and goods from Asia has kept a lid
on wage growth in the US.
- The
capital expenditure by US companies in the US
has been quite small, but has been huge in China and other Asian
countries.
- About
60% of all Chinese imports to the US
come from factories built with US
capital for the sole purpose of exporting back here to the US: simple
outsourcing of production.
- To
keep the Chinese renminbi from rising against the dollar in spite of huge
trade imbalances and massive dollar-based direct investments by the US,
the Chinese Central bank has: a) created new renmimbi out of thin air; b)
to sop up all of the incoming dollars; c) to then reinvest those dollars
into US treasuries to keep interest rates (and mortgage rates) low; and d)
to create massive growth in internal money supply that has been driving the
value of all assets and now living costs higher. The internal inflation rate
has become so great that the Chinese must now let the renminbi float
higher raising the cost of manufacturing in China
just as labor markets have finally tightened in China which is also pushing up
the cost of manufacturing there. These two factors, rising exchange rate
and labor rate, may raise manufacturing costs in China
relative to the purchasing power of the dollar by 8 to 12% in 2008. This
cost increase will have to come out of the margins in private label goods
coming from China.
- Bombay Company, a furniture and home accessories retailer based out of Fort Worth, declared
bankruptcy in December. They pioneered 18th century,
British-styled furniture from China
at amazingly low prices starting in the late ‘80s, a full ten years before
the furniture import boom from China started.
- Furniture
imports to the US,
primarily from China,
have risen from just under $9B in ’98 to $27B in 2006. In four years, from
2002 to 2006, the value of furniture production in China tripled from just under
$20B to $60B.
QUESTIONS:
- Does
it sound like the race to outsource production to China has
been substantially run by manufacturers looking to dramatically lower
costs while maintaining US pricing to maximize earnings growth over the
past 5 years?
- Do
you think every retailer (and wholesaler) who wanted to by-pass
opportunistic manufacturers that had become outsourcing importers and get
in on the private label, knock-off action has substantially done so?
- When
the same brand name and clone, private-label products come from the same
plant or the same people with another plant next door, won’t the fat
margins be cut to the point where the premium profitability disappears?
- If
the premium profits go, but the channel has two or more labels for the
same product with duplicate inventory investment, isn’t this an over all
drag on ROI?
- What
happens when niche sellers have their best selling products cloned and
sold by the large generalists for even less (think Wal-Mart selling the
best items for less against Best Buy in electronics and Toys-R-Us in toys:
or, the largest furniture chains vs. Bombay)?
- Won’t
the final winners of the private label, clone, price wars either be: a)
the player who has the best total supply chain economics from China
through master distribution centers here in the US that provide
one-stop-shop supply to the next (final?) point of distribution?
- If
we are a distributor or retailer with our own line of specially designed
products from Asia, shouldn’t we be
vigilant about our best selling products being cloned and sold by our big
volume generalist competitors?
- As
costs to produce rise in China
and manufacturing moves to Vietnam
or other long-term viable (?) countries, what should manufacturers and
direct-buying distributors/retailers do the next time around?
CONCLUSIONS
- The
premium profits made off clones from China game is over.
- Total
manufacturing volume of labor and/or pollution intensive goods will
continue to migrate to Asia at a much slower
pace. The US recession
will hit supply-chain Asia harder than
many think.
- The
game of selling clones for less will ultimately be won by the channel
players that have thought through the total, longer-term economics of
price wars and have designed the lowest-cost, highest fill-rate pipeline
from Asia through master distribution
centers with the best channel-focused, hub economics. Third party
logistics companies that do master DC work for many different types of
products that sell to different end-users in different channels will
disappear.
- The
only way to have a brand-name that sells for more is to continue to
reinvent and refresh the product line or the total system economic benefit
that it delivers. Knocking off today’s best seller and selling it for less
is only a short term grab; it isn’t a long term sustainable profit maker.
That’s all for this edition
of the DCC! Best wishes to all,
Bruce
bruce@merrifield.com
