January 7, 2009: Distribution Channel Commentary (DCC) #
107
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Quotes
Parable To Explain Recent Money Management Strategies J
Epic Downturn; New Rules; New Tactics
“The Ownership Quotient”: Latest In Service Value Innovation
February 12th Seminar In San Francisco On “Strategic Business
Intelligence Service”
E-Selling Direct Past Your Happy Dealers With Amazing Warehouse Robots
Quotes:
“There is no future in living in the
past.”. . . Sparky Anderson
“I believe the times demand new invention, innovation,
imagination, decision. I am asking each of you to be pioneers on that New
Frontier”. . . JFK (7-15-60 nomination
acceptance speech)
“Until
one is committed, there is hesitancy, the chance to draw back, always
ineffectiveness. Concerning all acts of initiative and creation, there is one
elementary truth the ignorance of which kills countless ideas and splendid
plans: that the moment one definitely commits oneself, then providence moves
too. All sorts of things occur to help one that would never otherwise have
occurred. A whole stream of events issues from the decision, raising in one's
favor all manner of unforeseen incidents, meetings and material assistance which
no man could have dreamed would have come his way. Whatever you can do or dream
you can, begin it. Boldness has genius, power and magic in it. Begin it now.”.
. . Johann Wolfgang van Goethe
“Do not pray for easy lives. Pray to be stronger! Do not pray
for tasks equal to your powers. Pray for powers equal to your tasks.”. . . Rev.
Phillips Brooks
“And Moses sent them to view the land…they (returned) and
said…the land floweth with milk and honey…but it hath very strong
inhabitants…(Caleb) “Let us go and possess the land, for we will be able to
conquer it…(others) “No…they are stronger than we…in comparison we seemed like
grasshoppers.” . . . (Bible) Numbers: 13
“The answer to how is yes; act on what
matters”. . . Peter Block
Parable to Explain Recent Money Management Strategies
Young
Chuck moved to Texas
and bought a donkey from a farmer for $100.00. The farmer agreed to deliver the
donkey the next day. The next day he drove up and said, 'Sorry son, but I have
some bad news, the donkey died.'
Chuck replied, 'Well, then just give me my money
back.'
The
farmer said, 'Can't do that. I went and spent it already.'
Chuck said, 'OK, then, just bring me the dead
donkey.'
The
farmer asked, 'What ya gonna do with him?’
Chuck
said, 'I'm going to raffle him off.'
The
farmer said 'You can't raffle off a dead donkey!'
Chuck
said, 'Sure I can Watch me. I just won't tell anybody he's dead.'
A month later, the farmer met up with Chuck and asked,
'What happened
with that
dead donkey?'
Chuck said, 'I raffled him off. I sold 500 tickets at two
dollars apiece
and made
a profit of $898.00.'
The
farmer said, 'Didn't anyone complain?'
Chuck
said, 'Just the guy who won. So I gave him his two dollars back.'
(Circulating internet humor; author unknown)
Epic Downturn; New Rules; New Tactics
2008 was a humbling experience for most of us, and we are
now looking at a tough economic road in 2009. While the central banks and
politicians try to improvisationally, borrow and spend our way out of our
borrow-and-spend hangover, let’s resolve to never waste a good crisis.
Let’s do the right, smart stuff that we know we should within the context of
the new, restrictive economic rules.
What are the new rules and
related tactics?
1. Debt is now
not fashionable. Banks around the world are continuing to trend towards cutting
back on credit limits and tightening terms (I’m currently involved in a work
out case with a bank that now owns the company, they just don’t know it yet.)
2. To borrow
at a “low” interest rate to invest in an asset that is deflating is actually
very expensive debt. Consider the Fed’s objective of making 4.5%, 30-year
mortgages available for first-time home owners:
a. How many
people in their 30’s (who are incidentally fewer in number, because of the
baby-boom, birth-bust years of the mid-70’s) have a real 20% down-payment (an
old rule that is back)?
b. How many
of these buyers have secure jobs – as unemployment continues to climb – with
which to service this debt?
c. Would you
borrow at 4.5%* to invest in an asset that is, on average, across the US projected to
drop another 10 to 15% over the next 12 to 24 months?
·
*4.5% is on an after-tax investment return and
expensive rate.
3. To save,
conversely, at zero percent; be frugal on spending; and then buy what you need
later at a fire-sale price is actually quite a good return on your savings,
even if the dollar starts to also be debased versus other currencies.
4. To better
service existing debt or build balance sheet strength to either buy assets when
there is “blood in the streets, even if the blood is your own”(Baron Nathan
Rothschild during the Panic of 1873 in Paris); or, pounce on competitors
that are imploding because of their debt: we must generate positive,
sustainable cash flow. How?
a. It will
be tougher to make money on the “buy side” without any “growth rebates”, so
don’t try to buy your way to profits if it builds inventory and working capital
debt.
b. Don’t cut
price to buy more volume. Distributor economics are such that 100% of a price
cut comes out of the bottom line, but all new volume has lots of variable costs
and working capital needs. The volume increase needed to keep the profit line
the same is about 30%, but receivables, inventory and the bank line will all
increase. Besides, where are we going to get 30% increase in sales in a tough
market?
c. Identify
the number one, most profitable niche of customers; then redefine the service
value equation metrics for that niche; improve the service; sell it; get paid
for it; and then sell more old items to the same old customers on a larger
average order size basis so that 50% of the incremental margin dollars in an
already money-making-sized order will flow through to the profit line.
d. Partner
with (new) “master distribution center” partners to: reduce inventory
investment; free up cash; improve “turns” up more than “earn” goes down; and
improve fill-rates and fill-rate benefits by typically more than 10%.
e. Pursue
selling strategies that increase the estimated profitability of all types of
customers and make sure that the sales force is trained and paid to
do that. Paying reps on a percent of the sales or margin dollars in their
territory will not do this.
5. We must
de-average our thinking. We can’t assume, for example, that “the sales
force” is – on average – going to go out and do something differently. Rather,
most will keep doing what they do while a few game-breaker reps and managers do
the change work and then let the steadies take care of the new order of
business. We can’t assume that all customers or all customers in a “still
growing segment” are going to do the same. Less than 5% of existing businesses
are perpetual innovators that grow 2 to 5 times faster than their industry
average. We need our total team to hyper-focus on co-creating new levels of
win-win value with those “gazelles” and less with the 50%+ of all small
businesses that are moribund and giving us necessarily small, money-losing orders,
because they are small with small needs. Let’s hope that we aren’t giving them
“average service” that includes delivery and trade credit at full wholesale
prices, because we are still losing money on them, because transaction costs
per order exceed the margin dollars in the order. For these “wholetail”
accounts (between true wholesale and high-cost-per-square-foot retail), how do
we:
a. Spin out
a cash-n-carry location and business model to take care of them at a profit?
b. Encourage
them to buy from a wholetail partner for whom we are a master distributor on an
automated, third-shift replenishment basis?
c. Drive
them elsewhere while we lay off more fulfillment-personnel-cost dollars for
taking care of their empty-margin-dollar order activity than we lose in margin
dollar volume. We will make more profits on a little less volume while we focus
our best, remaining people on the true wholesale accounts that do have a growth
future.
6. If we are
too busy to focus on doing the right stuff, it is because we are currently
spending to many “activity or cost-to-serve” dollars on the wrong customers and
even the wrong customer niches in which we are not the #1 or #2 dominant,
best-value competitor. We must first weed or downsize money-losing elements of
our business before we can have the tied up resources to reinvest in what we do
best on a next-level basis. Decathlete distributors that are guilty of trying
to sell 10 (or more) different niches don’t get profit gold unless they are #1
in the niche. How many niches do we sell? Multiply these variables: industry
segments (x) A-B-C sizes (x) why they buy: pals-value-price (x) their growth
future: gazelles-average-dying = lots of potential niches!
7. Most
companies need much better “strategic business intelligence” analytical,
reporting and tracking capability than they currently have to do all of
this.
“The Ownership Quotient”: Latest In Service Value Innovation
In 2009, it will be vital to figure out how to make money
on the “sell side” by re-inventing our service value equation/proposition for
each customer niche that we want to dominate. How would the “average” employee or
the top few people on the payroll answer these questions?
1. What is
our #1 niche of customers from which we get the most, estimated profits?
2. Who are
the 5 most profitable customers within that niche? By conferring with them how have
we redefined our “service value equation” for that niche to then break it down
into 8 to 11 specific service metrics that we measure everyday internally?
3. If one of
the 5 most important, profitable, core (niche) customers or core target gazelle
customers contact us, how do we go about doing spontaneous “heroic/extra
service efforts” for them? Why? Give some examples? Do you feel confident and
empowered to do extras for them?
4. What type
of reporting system do we use to measure, track and improve on all of these
objectives and compare performance numbers across branches, because an
accounting ERP system isn’t sufficient by itself?
5. Why
should you care about any of this? What’s in it for you? How will you
personally economically benefit in the short and long run?
If the answers are weak and lack group focus, then buy the
recently published book entitled: “The Ownership Quotient”. I wrote a book
review for it at Amazon. Here are links to my review and to the book’s web
site.
http://www.amazon.com/review/product/1422110230/ref=pd_bbs_sr_1_cm_cr_acr_img?_encoding=UTF8&showViewpoints=1
http://www.ownershipquotient.com/
FEB. 12th Seminar In San Francisco On “Strategic Business
Intelligence Service”
Whatever your “business intelligence” experience or
in-house capabilities might be, you can improve on them dramatically by
attending this “by invitation only” seminar that I will be conducting with a
strategic partner, Waypoint Analytics, from 9:00 AM to 3:30 PM at a location
near the Oakland Airport. (I understand that, currently, all Western city
dwellers can fly in and out of Oakland on the same day on Southwest for $59
each way.)
For companies that already have a good BI capability, you
may qualify to come to benchmark your capability against what we have: make
each system stronger! We continue to upgrade our total capabilities by the week
thanks to our growing group of distribution firm users/advisors.
For companies that have had frustrating experiences with
BI or want to get the best, distribution-specific, capability for the least
total cost with the highest, quickest return, this is the session for you.
If you represent a group of distributors, because you are:
·
A supplier with exclusive/selective distributors
·
A buying group executive
·
A trade group executive
·
A turnkey software vendor looking for ways to
improve your own BI offering or looking for a house brand solution partner.
You are welcome to attend!
Any and all who are interested please contact me at bruce@merrifield.com so that we can
visit further about this opportunity, and I can send you more detailed
information. For those who want to do some additional reading on the subject, check
out my last three articles that are posted on the home page of our web site.
If the Bay Area on February 12th doesn’t work
for you, then our next seminar will be in Chicago sometime in March. Because we
hope to do about one per month, through May or June, let us know what city
might work best for you.
E-Selling Direct, Past Your Happy Dealers With Amazing Warehouse
Robots
Over the past few years, I have been asked the following,
inter-related types of questions on an increasing basis. They all can be solved
by using new software-as-a-service solutions combined in some cases with
outsourcing warehouse fulfillment (especially if shipping is also outsourced to
small package carriers). Here are some of the questions followed by some
interesting links:
1. Bruce, I
sell to and through (some category of small business), but they don’t do a very
good job of re-selling our goods, especially over the web with good use of
local-area google search ads. What can we do to help them do a better job?
2. Is there
someway that we can sell directly to the end-users, but reintermediate our
customers in some way that will make then not only happy, but motivated to turn
the final end-user on to buying that way? This would be especially good for the
50 to 80% of the items that we stock that the customer does not.
3. How can I
get small business customers to order from me electronically to cut down on
transaction costs? Then, in addition to that how could we have a unified web presence
with our customers to the end-user who might buy from us direct or indirectly
by ordering from the main warehouse, but picking it up quickly at the dealer’s
place on a “cross-docked” basis?
4. To efficiently
serve all end-user, e-customers within different target niches, our existing
warehouse(s) aren’t in the best locations, nor do they stock just the right
sub-sets of items: what can we do about these problems?
5. When one
of my top 10% customers needs to sell their business, they usually have a tough
time finding a qualified buyer, and we are concerned that any new buyer will either:
run the business into the ground; or, switch the big volume purchases from us
to one of our competitors. What can we do?
Guidelines for solving these types of questions:
1. Don’t
think that you have to invent and own the answer; find specialty firms that can
solve the functional need that you have and outsource the problem to them.
2. There is
now software-as-a-service that will run a small businesses through a browser
which lowers the “total cost of ownership” and complexity, especially for small
businesses. These solutions can then be modified to incorporate all of the
channel buying and (web) selling questions asked above to achieve the best of
both Mom and Pop ownership and the best of supply chain, turnkey solutions.
3. Web
selling allows a distributor to identify different niches of customers that
typically need a more narrow, but also deeper sub-set of products than what a
typical re-seller customer might stock, and the logistics of serving end users
is often different. A different footprint of warehouse locations for the region
or the country is apt to be needed.
4. FedEx and
UPS will offer to take care of the total warehouse AND shipping problem for
very high prices with big switching costs when they start raising their rates.
Wouldn’t it be great, instead, to find an independent third-party logistics
solution provider that could take care of all of our new warehouse needs at a
50% lower total cost, because they are using robots in their multi-customer
warehouses and regularly play off all of the small package carriers on a
routine basis?
Being a re-emerging, serial entrepreneur, I have partnered
with some software folks to be able to provide distributors to small re-sellers
with SaaS ERP solutions that have built in supply chain solutions AND a 3PL
company, Quiet Logistics, who can run existing or new warehouses at a 50%
lower, variable cost and solve E-selling logistics location problems. To
make your day and get a glimpse of the future (especially if Big Labor gets
rewarded by the Obama Administration and a solid Democratic congress with new
laws to make organizing warehouse workers more easily), check out the Kiva
Systems video at Quiet Logistics site at the link below.
Otherwise, if and when you are ready to discuss
“business model innovation” possibilities that are measurably identified by
good “strategic business intelligence” and easily enabled by SaaS channel
solutions, please don’t hesitate to call me. Why be victims of this tough
economy when there are so many upside innovation possibilities hiding within
our existing businesses?
http://quietlogistics.com/
So long for now,
Bruce Merrifield
bruce@merrifield.com
