APRIL
21, 2009: Distribution Channel Commentary (DCC) # 109
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, commentary service that is now posted at www.merrifield.com. (Past DCC’s are also
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 or RE-PURPOSING of ANY COMMENTARY CONTENT? YES! Just let us know by email what you
want to do, give us some credit and point them to our web site.
TOPICS:
QUOTES
BOSTON’S MARATHON
VS. OUR BUSINESS TREK: WEED. FEED. INNOVATE
THE SCIENCE OF
MUDDLING THROUGH THE “GREAT RECESSION”
RE-ENGAGING CUT-COST-WEARY
EMPLOYEES: CASE STUDY
RUN HIGH-LEVERAGE
SELLING CONTESTS (“free” kit & offer)
CLOSING THOUGHTS ON
SUPPLY CHAIN INNOVATION
QUOTES
"My forecasting record on this recession is
about the same as the win-loss record of the Washington Nationals." Ben
Bernanke
(Nats were 59 wins and 102 losses in '08; worst in baseball.)
"The
reasonable man adapts himself to the world; the unreasonable man persists in
trying to adapt the world to himself. Therefore, all progress depends on the
unreasonable man."
George Bernard Shaw
“There are no
rules here – we’re trying to accomplish something.” Thomas Edison
Leadership often requires a change in direction,
rather than desperate attempts to maintain the status quo...discovery often begins
by noticing an anomaly…Carpe Channel. DBM
BOSTON’S MARATHON
VS. OUR BUSINESS TREK: WEED. FEED. INNOVATE
As I type this at 8:45 (EST) on April 20th in
Boston, I’m planning on walking a few blocks - around the noon hour - to watch
the elite wave of runners finish the 113th running of the Boston
Marathon, the world’s oldest continuously run marathon. For the first time in a
long time, an American man, Ryan Hall, of Mammoth Lakes,
CA. comes into the race with the fastest time in the recent past, 2:06:17. But,
there are 5+ African runners with times within one minute of his, and for them,
the prize money would endow their extended family, even village, with survival
rations for a long time. Cooler than-average temperatures with a 15 mph head
wind will test the runners more than usual. Who will have the strongest body
and mind today? Stay tuned.
I’m back (1 pm). Ryan came in third after setting a record
pace for the first part of the race. Deribe Merga of Ethiopia was the winner in a heroic
2:08:42; Ryan finished in 2:09:40. In the women’s race, an American, Kara
Goucher, came in third after running in a tight bunch with the first two
finishers right up to the last eighth of a mile. In the closest finish ever for
women at the Boston Marathon, Salina Kosgei, of Kenya, beat Dire Tune by one
second 2:32:16 to 2:32:17 in a sprint that could have gone either way depending
upon who drafted who when puffs of wind hit. Kara Goucher was 8 seconds back at
2:32:25. Very inspirational to watch
live!
Meanwhile, many distributors are running a
financial-survival marathon of their own with no definite finish line 26 miles
and 385 yards out and no set journey map, because dramatic, innovative turns
can be engineered by individual contestants. Who will change the rules in
any given distribution channel? History suggests that – on average – only about
4% of the players in any mature industry have a track-record of being perpetual
innovators. Financial comparisons for members of an industry reveal that the
top 5% of the performers have these types of results: 2-5X the average industry
growth rate; 4-6X the ROI of the median; and 15%+ pre-tax return on total
assets. They most likely have:
a. weeded all of the losing,
inefficient aspects of their business;
b. found, fed and grown all of the
high-leverage, most-growing elements; and,
c. learned how to innovate from the
operational specifics to the inter-business space.
Overextended distributors in hard hit industries can’t prosper
with normal, best practices. In spite of the “green-shoot, bear-market-rally
offensive” from Washington and the stock trading community, consumers are under
a mountain of debt with deflating assets and declining jobs/income. Frugality
is in and will be increasing for some time. Our meltdown economy will take time
to heal slowly, especially any industry that serves the “consumer economy”.
So, what are the brave, ambitious, but over-extended to
do? If we are swimming upstream with best-practice strokes according to
industry-think and the current turns strongly against us, we can die trying to swim
against it. Relaxing will wash us out to sea. Should we swim hard and
strategically smart in a perpendicular direction to the tide while looking for
some, game-changing niche of an opportunity along the boundaries of the channel?
In today’s crisis climate with all-things digital
innovating exponentially will we find new openings? Yes! There are already
supply-chain innovation solutions popping up here and there amidst 150+
channels that are populated with independent wholesalers, reps and reseller
creatures. Why not borrow these models and apply them to our situation on a
test-cheaply basis? And, in this crisis, there are more than the usual number
of innovate-or-die, potential channel partners with whom to co-create channel
innovations. How should we start to think about the mantra: “Carpe
Channel!”
THE SCIENCE OF
MUDDLING THROUGH THE “GREAT RECESSION”
All of the economic forecasters that work for Washington,
Wall Street or the media (which is beholden to financial service industry advertisers)
must spin their stories to keep consumers feeling good, being happy, borrowing
and spending. How do we cut through this bias to better forecast our firm’s
sales and debt-service needs? Now the same experts who never forecasted our
unfolding “great recession” are generally saying: “the bottom in the markets
are in; recovery will be here by fall; the banks are stressed-tested and good
to go (assuming illiquid, impaired assets can be valued, once again, at
whatever management thinks that they will be worth someday).
Don’t you wonder how we can have a normal recovery (like
all since WW2) with the consumers and financial service companies still sitting
under the biggest debt mountains in the history of mankind while their
collateral continues to drop in value along with job income. The problem isn’t
“getting the banks lending again”. The problem is finding a borrower who: has a
steady, secure job; an old-school, down payment; and a desire to borrow at 4-5%
to buy something that is forecasted to drop in value for awhile longer. Any
interest rate in a deflating world is expensive money. How can houses stop
dropping in value in every city in the US when we have 11-12 months
official supply and more supply in the foreclosure pipeline? What potential
commercial borrowers are currently looking at buying or building commercial
real estate or plant capacity with so much slack in the system and deflating
prices?
I think that our economic marathon will be with us – more
or less, depending upon the industry – for some time. The firms that cut costs
the fastest and the most often have done less badly than the rest at least on
financial comparisons: SO FAR. But, cutting
costs past the bone is only a third of the marathon story. How many
firms have been able to address the
second third which is to simultaneously – upgrade; prune to grow; weed
to feed – the strategic, high-leverage, 1 to 3% of the employees, SKUs and
customers that are hidden in the blended financial numbers? And, the
last third of the race will be to do
inter-business, supply-chain innovation with the other top 1-5% channel
players who are also determined to get through all three legs of this marathon.
Cleary , it is
tough to innovate when we are up to our kiesters in alligators and our crew is
demoralized, which is why the middle piece of weeding to feed is so vital. It
will free up the resource energy and re-light the spirit of the crew members to
“Carpe Channel!”.
RE-ENGAGING CUT-COST-WEARY
EMPLOYEES: CASE STUDY
A client, call him “Bob”, who runs a distribution chain
that supplies both the residential and commercial construction industries
recently asked me:
“Bruce, what can I do to get my employees pumped up again? The good
news is that our management team has been perhaps too effective in downsizing
the business through three separate programs. We have cut jobs, wages, hours,
all benefits, etc. to and through the bone. We are financially surviving so
far. But, we are cost-cut weary and our industry trends are still grim. Where
is the hope?
Does
anyone out there in reader land, have a good, cook-book answer for this guy’s
pain and frustration? Bob and I first agreed that – at least in the garden – “weeding
to feed” and “pruning to grow” did work. But, in business we didn’t have to let
scarce, fixed-resources to flow to every part of what was left in the company
on a socialistic basis. We could try to focus some extra support to only the
most promising 1-5% (remember what history has taught us about perpetual
innovators and best performers?) As an experimental, thought exercise, we next
did a systematic review of his firm’s weeding activities to date to then look
for hidden, strategic feeding opportunities.
1.
Laying
off weakest employees (weeding) while cutting total compensation for the
rest/best and exhorting them to work harder with Bob leading impressively by
example. (Bob’s a shareholder, though, and most of the rest aren’t.)
KEY QUESTIONS:
a.
Does
the company have 1-5% of the employees who are fast-rising, already
track-record-proven, proactive game-changers who aren’t stockholders and may be
demoralized? How much more valuable are these people in switched on mode than
the rest? (Answer: “10X! Actually, it’s not really a comparison, because they
can make proactive stuff happen, and the rest are – at best – brilliant
maintainers of what is, which is good, but we need to change the game!)
b.
What
discreet, side-agreement could the company cut with these people to give them a
raise, special education/mentoring and key tasks to lead?
c.
Bob
quickly had some relatively “inexpensive experiment” ideas to try with a few
key employees.
2.
Trying
to renegotiate every trade and general vendor (rent, I.T., maintenance,
etc.) agreement. Same key questions about the 1 to 5% key suppliers with whom
the company could again do some discrete synergistic, resource investments. Some
“good experiment ideas” emerged here too.
3.
Stopped
every discretionary expense (education, travel) and capital investment.
(What discrete, high-leverage missions performed by high-leverage people might get
some ex-budget funding?)
4.
Shrinking
inventory both naturally with collapsing lead times and by continuing to hammer
away on “cash-trap” (excess stocked and dead item) ranking reports (while
“slimming down” productive inventory “a bit”) to help stay within bank loan
covenants. (What is the average investment in the top 1 to 5% items that are
picked the most times by the most customers? If they were beefed a bit while
competitors were democratically, slimming their best items, what would happen
on a total fill-rate economics basis and customer retention/satisfaction or
defection dynamics? “Hidden stuff, we have never explored or measured…let’s dig
into this a little further!)
5.
Remaining
steadfast on receivables which were shrinking on a lagging basis with the
plunge in sales. (In theory, there might be 1-2% of entrepreneurial customers
for which we could do some financing. We could explore this further too.)
6. On the sales front, they: cut out all training; laid off trainees (“eating our young”);
exhorted reps to make more calls per day by doing more planning, follow-up and
traveling outside of “face-time hours” in the day. KEY QUESTION: What about focusing total team power on the 1-5%
“high-leverage” accounts in the most profitable, customer niches? (Blank look;
see next topic section!)
No wonder
Bob was weary and the entire team down. This was all tough, but
necessary-to-survive activity. But, the ideas we hatched for focusing small
amounts of resources on small percentages of high-potential elements in the
business, got Bob re-energized. We’ll keep you posted on how innovatively we
execute these ideas and lay the ground work for stage three “innovation”.
RUN HIGH-LEVERAGE
SELLING CONTESTS (“free” kit & offer)
Bob, the star of the section above, and I co-created three
separate, but related contests:
a. The 5 most profitable and 5 biggest
losing accounts per territory contest.
b. Stage 2 of the 5/5 contest will add
a third “5”; the 5 most promising target (“gazelle”) accounts to become the “5-5-5
or triple nickel” contest with a monthly summary sheet for each rep, branch,
region and national.
c. And, the “TOP 10+ (X) Heroic
Service Acts” contest to get all employees on making things happen for the 5+
most profitable accounts and the 5+ best target accounts.
First, Bob and his management team had to buy into some of
my thinking about 5-5-5, high-leverage account marketing, so they all
thoroughly digested my 5-5-5 kit plus an annotated slide show of mine entitled “Fees
for Services”. I will extend to any
reader, the same “free offer” that I extended to Bob after our first phone
conversation. Download the two aforementioned documents from my web
site (links below). Invest your “sweat equity” (no cash outlays rule) by team
reading and critiquing what’s in those documents. Email me a summary of
critical comments and questions about what to discuss further, and I would then be delighted to give any
firm up to an hour of free phone consultation on their written stuff.
http://www.merrifield.com/exhibits/Ex44555kit.pdf
http://www.merrifield.com/articles/Fees_for_Services_slides.pdf
As for the cook-book recipes for the three contests that
we cooked up, I have summarized those in yet another document entitled: “Recipes
for Key-Account, Selling-Contests” which is under the “exhibits” button at www.merrifield.com at the bottom,
numbered #57. Here is the link: http://www.merrifield.com/exhibits/Ex57.pdf.
Warning! In order to weed to feed the high-leverage,
strategic elements of a distribution business, you will have to have a good business intelligence (BI) capability
that may exceed what you currently have in house. All is not lost, though,
for I have partnered with Waypoint Analytics (www.waypointanalytics.com)
which can provide a total BI solution to any distributor over the web
(software-as-a-service) within one to two weeks from signing a rental
agreement. This product is not only tuned to distribution companies, but incorporates
the capability to support all of my “high performance thinking and plays”, and
the total economics fit the times.
It’s easy to get a better feel for the power of this
service through a free:
Ø
webinar,
Ø
management team teleconference demo
or
Ø
a one-day workshop in a convenient
city location for you.
If you have any interest in any one of these three
formats, just let me know, and we’ll make it happen. New hope starts with fresh insights about how to do what
we have been doing a lot smarter (and more differently) supported by concrete
profit-power facts and tracking reports.
For those readers who have a 100% freeze on all extra,
discretionary spending, you will be relieved to know that the free cash-flow,
net of monthly service fees, is quick and significant. The fees are based on
line items billed per year. The cost benefit, by case example would be: a
single-location distributor with $8MM in sales, 35 employees, 24K lines billed
per year spent $5k to do the data transfer into the cloud computing and then
$1K per month in rental fees: $17K in year one, $12K per year thereafter. If
they aren’t happy with the results, they can stop renting at what downside
costs versus what they might have learned anyway. (Tuition/learning ratio?)
Larger firms pay higher fees, because of higher line item
processing, but with great economies of scale. The average customer will be able to get 3 to 10X the invest stream
back in return within 1 to 3 months –on a long-term sustainable basis –
depending upon how bold and quick they are to execute on the new insights that
are made possible.
CLOSING THOUGHTS ON
SUPPLY CHAIN INNOVATION
The good news is that never before has it been
easier and cheaper to create business solutions that reduce friction within
supply chains, and there are lots of opportunities. Consider:
1. Wal-Mart continuous
replenishment was invented and perfected from 1983-88, but most independent
distributors still buy from suppliers as they have for 100 years. The same old
cow-path process has been automated, but it isn’t delivering the results of a
Wal-Mart super-highway system.
2.
Amazon offers wonderful, DIY total web-based purchasing
supported by a logistical warehouse footprint (7 warehouses nationally) that is
quite different than the footprint of thousands of independent resellers buying
from lots of regional book wholesalers that are now mostly gone. And, the old
channel sold 10K books locally, backed up by 500K books at wholesale for 4MM in
print. Amazon’s model sells every publishers “long-tail” of products to
delighted customers that get more choices than what local retailers provided at
higher prices and less convenience. So, what type of front-end web presence do
resellers have that are buying from master wholesalers in other traditional
channels? How can the master wholesalers help their resellers have a web
front-end that makes all of the wholesalers inventory available on either a
direct-ship or next-day, cross-docked, at-the-reseller-location for will call
or local delivery? Grainger and Fastenal own both their wholesale locations and
their stores, so they can do these scenarios for the on-line, end-users, but
now so can any independent wholesalers and set of reseller partners. Software-as-a-service platforms exist,
which married with plunging internet storage and communication costs, can make both
back-end continuous replenishment and CO-ORDINATED/UNIFIED front-end
web-selling scenarios happen for a fraction of a shared-cost of what Wal-Mart
and Amazon spent seemingly long ago.
3.
In my last commentary, I encourage readers to watch a youtube video
that documents how Kiva System robots offer breakthrough total cost benefits in
comparison to the most sophisticated warehouse environments (Amazon, Zappos,
Wal-Greens, Staples). AFTER WATCHING
THIS VIDEO, REALIZE THAT THE QUESTION IS NOT “IF” ROBOTS WILL BE IN YOUR WAREHOUSE,
BUT “HOW SOON”; AND, SMALL DISTRIBUTORS CAN GET THERE BEFORE THE BIGS BY
OUTSOURCING THE WHOLE OPPORTUNITY! (?)
First, for those who have
not caught the video, here is the link:
http://www.youtube.com/watch?v=Fdd6sQ8Cbe0.
Second, for regular readers, here
is a latest, great article on Kiva’s innovative path and how robots are doing
at Wal-Greens:
http://www.businessweek.com/innovate/content/apr2009/id20090415_876420.htm?campaign_id=innovation_related.
Third, how can small distributors
get robot economics with faster, perfect service sooner? Outsource your troubles to QuietLogistics of Andover, MA. They will combine their world
class warehouse management software solution with the Kiva robots in: your
warehouse; in a regional multi-tenant warehouse (the first is open to see in
Andover from April 30th on); or in a multi-tenant, national,
small-package channel cooperative in Memphis or Louisville to outbound planes
or trucks from the big two package guys. As an investor and advisor to QL, I
can assure that this is the real deal. In an environment in which it is
very hard to raise venture capital, QL recently sought $1.5MM in formal,
first-round funding with ambitious selection criteria. They got offers for
twice the money in a fourth of the time that we thought it would take to raise
it, because the idea is so straightforwardly obvious. I’m conducting a
private tour for a few “channel captains” on April 28th next week.
QL is having a general open house on the 30th (if anyone wants an
invite to the 28th or an e-vite to the 30th, let me
know). Otherwise, call me for a tour, teleconference, etc. for anytime after
the end of this month.
4. The master-distribution and
wholetail spaces that Grainger and Fastenal have exploited continue to expand
(and kill the century old logistical footprints of traditional independent
channels) with the needs for:
a. Blending containers of goods from
Asia with truckload shipments from domestic factories for two or more suppliers
with the same downstream customers. Suppliers must get out of the domestic, LTL-shipment-to-distributors
business and switch to a Colinx.com (factory co-op in the bearings/power
transmission channel) model. Where are the 3PL facilities that provide
master-distribution-center, continuous replenishment in your channel?
b.
Special-order, small-orders for emergency parts and pieces as well as
factory niche items that can’t get enough local sales to justify local stock by
distributors need a web-direct channel that reintermediates the channel
partners. If my local, independent, appliance-repair guy can order the part he
needs on his iPhone from Sears’ central warehouse at 6 pm at night to
arrive at my house tomorrow at 10 am, why can’t independent channels identify
and create these channel scenarios. It dramatically reduces supply chain
paperwork costs, total inventory investment and time to solution to maximize
uptime economics and minimize downtown economics.
c.
And finally, every wholesaler that has gone to market with outside
sales reps since the beginning and that has a metal building away from
commercial/consumer traffic visibility has a small customer/small,
money-losing order opportunity. These customers need to buy twice as much,
half as often and pay freight or go to a wholetail location to pick out and up
their own stuff and pay wholetail prices with cash or a credit card. How
measurably big is this transformation opportunity within your business? No
outside-sales-driven distributor is going anywhere except perhaps out to sea
until they solve this big, hidden-loss problem.
I could go on, but now for the bad news: only 1-5% of the
existing channel players are so efficient and effective at how they have both
downsized ALL of the losing elements of their business while upgrading ALL of
the high-leverage, strategic elements of their business, that they can both see
and execute on good innovative ideas. The rest are too busy cutting costs and
trying harder at all activity (profitable and unprofitable). They are running
their businesses with financial numbers that are averaged out symptoms of the
hugely cross-subsidized aspects of their profit power winners and losers.
But, fast, affordable business intelligence insights and
plays that will both upgrade your business and allow you to seize the
innovative opportunities at hand are available from Waypoint. Contact me to
participate in a webinar, demo or workshop!
All the best,
Bruce
bruce@merrifield.com
