February 27, 2021


















July 1, 2008 - Distribution Channel Commentary (DCC) # 106

July 1, 2008 - Distribution Channel Commentary (DCC) # 106

Greetings:

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

·          A FREE SERVICE: The Merrifield Consulting Group, Inc. (www.merrifield.com) is offering this opt-in periodic (formerly weekly) commentary service that is now being posted at www.merrifield.com. (Past DCC’s are all posted there.)

·          SHARE THE KNOWLEDGE: ADD OTHERS (OR, DELETE ME!)

·          To make this free service continue to happen, we must reach more individuals who care about making independent distribution companies/channels more effective. If you know of others who might like to receive this service, please: forward this commentary on to them; encourage them to email karen@merrifield.com to have her add their email address to our list; or, send them to our web site. If you don’t like this type of mail, ask to be deleted, and we actually will.

·          RE-PUBLISHING/RE-PURPOSING ANY COMMENTARY CONTENT? YES YOU MAY!

Just let us know by email what you want to do, give us some credit and point them to our web site. We are delighted to have a number of: trade associations; channel publications both printed and on-line; software firm publications; buying groups; and university programs that have all found re-purposing applications. Some just post the entire commentary on their site; others will post excerpts with their preface remarks. We’re flexible; the answer is "yes", what’s the question?

 

QUOTES

QUESTIONING RESTRUCTURING NEEDS AND SCENARIOS.

WHAT IS “WHOLETAILING”?

HOW TO RETHINK MASTER DISTRIBUTION CENTER ECONOMICS?

THE CORPORATE SMUGNESS TEST; WHO ARE YOUR CASSANDRAS?

HOW DO CONSOLIDATORS AVOID THE KINKO’S FADE AT FedEx?

THE BIG SWITCH.

SHIFT HAPPENS TO JOHNNY BUNKO (FOR KIDS WITHOUT SUMMER JOBS).

 

QUOTES

 

"We're only about a third of the way through the write-down. There are a lot of problems out there and it will continue to be felt through the year. We don't see any signs of stabilizing.''

John Paulson (of Paulson Partners, who made $3B+ in personal income in 2007 for shorting sub-prime debt to make a 591% return) on 6-18-08 to the International Hedge Fund Conference in Monte Carlo.

 

"We're right in the middle of it right now, I think the 'flation' part will heat up and I think the 'stag' part will get worse.''             Warren Buffet ('in an interview on Bloomberg Television on 6-25-08)

 

“Not choice, but habit rules the unreflecting herd,”            William Wordsworth

 

“If a problem cannot be solved, enlarge it."         Dwight Eisenhower

 

“Ancient rules for ancient men

But this is now and that was then

Don't lay your heavy hand on me

And sink me in your poison sea

It's us and them

It's me and you

It's guessing games

It's what to do

Exactly like you said to me

Things ain't like they used to be”        Duke Ellington (words from: “Things Ain’t What They Used to Be”)

 

“Cheap, utility-supplied computing will ultimately change society as profoundly as cheap electricity did.”               Nicholas Carr author of The Big Switch

 

China has more honor students than the US has students…the top 10 in-demand jobs in 2010 didn’t exist in 2004…we are educating our students for jobs that don’t yet exist that will require technology that is yet to be invented for solving problems that we can’t yet define…”.          Shift Happens      http://youtube.com/watch?v=FqfunyCeU5g

 

QUESTIONING RESTRUCTURING NEEDS AND SCENARIOS.

A number of industries – housing; airlines; automobiles; RVs; retailers of specialty consumer products; banks; investment banks - are now in dramatic restructuring mode. Other industries – commercial construction; state government spending; etc. - are soon to follow. It’s time for many American businesses and industries to start to make first-time-in-our-career-and-industry, structural changes, not just the usual, cyclical-downturn ones.

 

What industry are you in? How will it ultimately be affected by the unwinding of the global credit bubble which begat many other bubbles? What should you do? I have written about tactics, strategies and case studies for downturns going back to the downturn of 1991. In case your industry and business is coming under unusual economic pressure, you are welcome to check out excerpts from these writings for ideas:

a.       Exhibit 55 at http://www.merrifield.com/exhibits/Ex55.asp is an edited compilation of excerpts from four different sources of mine. Skim through them and flag ideas that speak to you.

b.       Article 1.20 “The Distributor and the Professor Questionate Restructuring” http://www.merrifield.com/articles/1_20.asp released on June 19, 2008 highlights a rethinking process that creates a “question map” to better inform eventual restructurings.

 

I have been involved in a few restructurings to date that have had some interesting, emerging solutions:

            a. One company had to formally write down both its historical, dysfunctional, unspoken, corporate-culture assumptions and the new ones going forward, so that they could then:  downsize all of the loosing elements of their business to redirect fewer, better people and resources into upgrading their value proposition to the very-few, right, best customers in their #1 niche to not only retain them, but grow them significantly in a down market. They estimated that 50% of the incremental margin dollar growth from selling more old products to existing, best customers on a larger, systematic, average order basis flowed through to the bottom line. By doing team-to-team reviews of the complementary, inter-company processes, the distributor was able to re-work their services to provide more, better and 10X-faster service values for a handful of most important accounts. Share of account sales subsequently grew 20 to 100% off of big base volume for 5 different accounts. 

            b. A second company discovered that 80% of its customers that were receiving traditional full-service (which included: an assigned outside sales rep; inside sales order taking; warehouse picking and packing; delivery on company trucks; and trade credit) were costing the company money because the average margin dollars in the transactions was less than the average cost of a full-service order. They set up a new, different named/branded wholetail store (WTS) on a busy commercial strip not far from the distribution center which was in a warehouse zone with little traffic. They then introduced minimum orders and delivery fees that varied for different levels of small and money-losing accounts which forced these accounts to: 1) order less often in larger quantities and often pay delivery charges; 2) go to the WTS to get their goods; or, 3) switch to a traditional-thinking competitor that provided full-service at a loss. The net economics were a big win. The company was able to lay-off/reduce more than twice the operational cost dollars that had serviced the huge-activity-cost, low-margin-dollar business that went to the competition. And, the cash and carry WTS was making an excellent profit in three months time.

            c. Three independent regional chains in a distribution channel impacted by the housing downturn were all losing money and had overlapping locations; they merged into one company and eliminated a competitive location in 50% of the cities that they were in. They are making money and now able to start cherry-picking best sales reps from some of their other competitors that are tanking.

 

What kind of tough questions and scenarios are you currently living with? Have you questionated your challenge as the “distributor and professor” did in article #1.20 referenced above?

 

WHAT IS “WHOLETAILING”?

Wholetailing is a hybrid business model that may create new value space between what big-box retailers don’t offer and the over/under-service that traditional distributors provide. It can provide breakthrough value for the time-is-money, emergency, spot and/or convenient-location buys that are especially prevalent in contractor channels where labor opportunity costs and fast, service-response-time needs for customers are both important.

 

The wholetail model provides more service value than big-box retailers to target customer segments by having: broader, deeper, one-stop, in-stock product-solution offerings; more convenient location(s) with faster in and out time; manager expertise; the ability to cross-dock commodity items at low prices as well as service items from a nearby master replenishment center.

 

It provides less services than the traditional full-service distributor, because it typically has: few to no accounts served by outside sales reps; sells for cash or credit cards with little to no trade credit; DIY store format; and little to no delivery. There is little to no special stocking of items for any particular customer. And, the pricing is whatever the traffic will bear, which is generally between wholesale and retail markups. Some specialty items may be above retail, and the top 3 to 10 most price sensitive commodities can be bought for low prices IF the customer pre-orders them in even cases today for tomorrow pick up, so that they can be cross-docked from the replenishment center. If any of the traditional services are offered, they are on a for fee basis.

 

It provides a unique, lowest total solution cost (which includes: labor opportunity cost + service solution speed value for the customer + cost of the goods) for contractor, maintenance and DIY consumers/people who happen to be within the convenience, drive-time radius of the store.

 

The location is like those chosen by Fastenal and WW Grainger, light commercial space that is visible to a lot of drive by traffic. It isn’t super expensive retail space or super-cheap warehouse space. The format is help-yourself.

 

Key design guidelines for a wholetail store (or spinout of losing customers from a full-service distributor) are:

1.       Outsource all buying to a cost-plus replenishment center that can ideally serve many wholetail (and distributors) locations in the greater trading area on a third-shift basis to make all of the replenishment center’s inventory “virtually available” to end-users on a next day basis.

2.       Automate the replenishment relationship with: paperless EDI transactions; barcodes from stem to stern; scanning and credit/debit card swiping at point of sale; and front-end e-ordering and information services for regular customers.

3.       Outsource the entire IT needs to an on-demand (utility, Software-as-a-Service/SaaS) solution vendor, so that all the store manager or owner/operator has to do is: know the products, know the customers and be from the neighborhood to have local loyalties.

4.       If the store is a spin-out from an existing full-service distribution business it must have an arms length relationship and identity. Otherwise, best customers will stop at the location frequently for its time-is-money value, but still want their normal: contract prices, trade credit, paperwork billing and even special-stocked items from the store. This best of both worlds’ economics can’t be allowed which will upset both the customers and the full-service sales force. So, be prepared to deal with it.

5.       Many customers will ask for trade credit and discounts which they don’t get at wholesale clubs, Home Depot or any other big box retailers. Why should you cave? These same whiners are already using credit cards at the other retailers, and you have a unique value proposition that they can’t get anywhere else. Some will try to punish the store and find higher total solution costs elsewhere; let them. No business model can be all things to all customers, and the punishers may eventually come back for best economic value when they are in the neighborhood and have an emergency buy need.

6.       There is an entire new array of marketing tactics and skills that a WTS needs to communicate its value to lots of new, small, potential customers within the convenience economic radius of the store. Think these through and execute them at the right time just before the store opens and especially for the first six to nine months. Don’t build it and assume that they will come quickly.

    

HOW TO RETHINK MASTER DISTRIBUTION CENTER ECONOMICS?

The best wholetail business models should be able to get third-shift or next day replenishment from a master replenishment center (MRC). Distributors have, however, tried to by-pass MRCs and buy direct to get lower landed costs and higher selling margin percentages. This is “first level” thinking and not total supply chain systems and value thinking. Otherwise, why wouldn’t Wal-Mart stores buy the biggest commodity products on a direct store delivery basis? As it is, about 6% of WMT’s items account for almost 70% of its sales, and all of those items are cross-docked through its MRCs, because it boosts the inventory “turn-earn” and dramatically improves “fill-rate economics”.

 

When WMT first pioneered “quick response” (automated, vendor managed replenishment), they were stunned to discover that fill-rates in the stores went from the low 80’s to the high ‘90s which dramatically increased customer: sales, satisfaction and retention. If items can be replenished every day or two, then forecasts for demand get very good and stock outs or overages can be tuned several times a week. If an item turns 4 times per year, which means it sits in stock for 3 months on average, then forecasts will be off by plus or minus 40%. Buyers will then have to wait until the next quarterly buy to correct both the excess-stock and poor fill-rate problems. As they try to put together that next direct-from-the-factory, meet-the-minimum-shipment-total order for the entire factory line that is stocked, what are the odds that they will be able to offset past overages and stock outs and get demand for the next quarter right? Because of product substitution selling and fill in purchases from wherever, the demand forecast data continues to deteriorate along with the forecast guesstimates. The bottom line is that it is better to pay another 4% (WMT and McDonald’s stores) to 7% (drugstores, grocery stores and hardware retailers) to a MRC supplier to increase turns and fill-rate economics for a better total-economic-purchasing solution.

 

To see how traditional “pure wholesalers” in the janitorial supply channel that only sell “resellers”, not the end-users are trying to sell this MRC partnership concept to both manufacturers and distributors, check out this 16 page PDF story at the following link:

http://www.sswa.com/docs/SSWA_ExecutiveSummaryBrief.pdf.

 

It is time for many manufacturers, distributors and distribution chains in many different product channels to rethink how they use MRCs, if they want to both lower total costs and improve fill-rate economics off the shelf at the local distribution locations. 

 

THE CORPORATE SMUGNESS TEST; WHO ARE YOUR CASSANDRAS?

Smugness, or complacency, is the target chosen for the latest book by John P. Kotter, a Harvard professor and an expert on leadership and change management. Based on his theories, here's a test of your company's complacency quotient:

 

1.      Does management concentrate on financial and other indicators which portray the company in a favorable light, and ignore others that are unflattering?

2.      Is the corporate standard of living visibly and luxuriously high?

3.      Does the company test its performance against the best competitors in its industry and outside, or only against its own previous best results?

4.      Are managers held responsible for both their own unit's performance and that of the total business?

5.      Are targets expressed in soft verbal form or in hard numbers or requirements which directly affect corporate performance?

6.      Is there a mechanism that can rub insiders' noses in the truth of outsiders' perceptions?

 

If the first two answers are Yes and the others No, the company is probably already in deep trouble.

 

Past success tends to fade as the business model and methods don’t change as fast as the business environment and best competitors, but entrenched managers don’t change, they just rationalize the fading results better.

 

Some company’s may be lucky to have an employee or two or outside advisor(s) who are like the mythological Cassandra, they are blessed with the ability to see where and how the trends will intersect in the future and how the company should change to get there first. But, Cassandra was also cursed so that no one else could see or believe what she could foresee. Needless to say, most companies don’t like or listen to Cassandras, so they stay smug and don’t change.

 

Do you have (outside advisory) Cassandras? Do you or could you listen to them? If at first you don’t agree with them, how do you rephrase their predictions into questions that everyone on the management team lives with for awhile? How else can you see and get to the future first, so that the company can thrive rather than barely survive or slowly die?

 

HOW DO CONSOLIDATORS AVOID THE KINKO’S FADE AT FedEx?

As a big fan of the historic FedEx and Kinko’s before they were merged, I was sad to hear this news:  On June 3rd, FedEx announced that they were changing the name of their Kinko’s division to “FedEx Office” and writing off another $900MM of the $2.4B price that they paid a buyout firm for Kinko’s in 2004.

 

My reading between the numbers is that:

1.       FedEx felt compelled to do something to match and perhaps leapfrog what UPS had accomplished with their very successful franchising of UPS stores (which don’t typically offer copying and other document-related services like the old Kinko’s). So, without doing some deep thinking, they overpaid for Kinko’s.

2.       Kinko’s locations then did a power fade in core copying services from being the #1 chain to lagging what Staples, Office Depot and Office Max do in copying.

3.       The intrapreneurial culture that existed at Kinko’s and which allowed it to grow so fast and profitably was killed by the private equity owners’ short-term focus on profits and then FedEx’s corporate bureaucracy.

4.       Now a great brand name Kinko’s has been damaged and dumped for the new, totally non-compelling “FedEx Office”.

5.       FedEx would have done better to do their own organic franchise stores like UPS’s even if they were starting several years too late in response to the UPS store roll out.

 

My general conclusion is that consolidating small, fragmented service industries (like distributors and copy centers) to achieve “economies of scale and scope” isn’t so easy. The key for consolidators is to be able to create and maintain an intrapreneurial culture that will keep and attract local profit center managers who outperform the independent owner operators which they will still compete with. Why do chains have to trade off centralized economies of scale for declining local service quality, intensity and flexibility for end-users? How can they make it an and/both story? I have, of course, some very comprehensive thoughts about this question in case any chain is interested.

 

THE BIG SWITCH.

This is the title of a book by Nicholas Carr which I enjoyed as a read, but do not recommend to readers. You can check out the reviews at Amazon, but here is an excerpt from the introduction that will give you the drift of the book which is more an historical account of how the electric grid came into being than how you can rethink your value propositions with the use of utility software.

 

“A hundred years ago, companies stopped generating their own power with steam engines and dynamos and plugged into the newly built electric grid. The cheap power pumped out by electric utilities didn’t just change how businesses operated, it set off a chain reaction of economic and social transformations that brought the modern world into existence. Today, a similar revolution is under way. Hooked up to the Internet’s global computing grid, massive information-processing plants have begun pumping data and software code into our homes and businesses. This time, it’s computing that’s turning into a utility.

 

Cheap, utility-supplied computing will ultimately change society as profoundly as cheap electricity did. We can already see the early effects in the shift of control over media from institutions to individuals, in debates over the value of privacy, in the export of the jobs of knowledge workers, even in the growing concentration of wealth. As information utilities expand, the changes will only broaden, and their pace will only accelerate.”

 

If you would like to do some quick research on “utility software”, try this. Go to google and type in:      “the future of utility computing” + 2008 + PDF. You can also try substituting “software” for “computing” and “article” for “PDF”. Either set of links that come up will help you to start thinking about how your company will migrate more or less from on-site software solutions to on-demand ones.

 

SHIFT HAPPENS TO JOHNNY BUNKO (FOR KIDS WITHOUT SUMMER JOBS).

This summer has been the worst summer since records were first kept in 1948 for kids to find summer jobs, and I was recently interviewed by some rising college sophomores and juniors about what kind of jobs will be out there for them when they finish college with big loans to pay.

 

I recommended that they watch the youtube slide show entitled “Shift Happens” at this link:

http://youtube.com/watch?v=FqfunyCeU5g.

 

I also recommend the Manga cartoon book (takes 20 minutes to read) entitled: “The Adventures of Johnny Bunko: The Last Career Guide You’ll Ever Need”. It’s a fun book with six key guidelines that are more profound than the average kid will get. So, I helped them to not only understand the six guidelines more deeply, but added a few more of my own so that they felt empowered to go out in search of the new emerging, better jobs that they will co-create along with the forces and new industry companies in the “creative economy”. They were pumped!

 

Here’s a Bunko question for companies in mature, consolidating industries: how do the six guidelines apply to the company? The guidelines are:

a.       There is no plan.

b.       Think strengths, not weaknesses.

c.       It’s not about you

d.       Persistence trumps talent

e.       Make excellent mistakes

f.        Leave an imprint.

 

That’s all for this issue! Happy summer experiences to all!

 

Bruce   (bruce@merrifield.com)

 

DCC # 106, July 2, 2008