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
