February 19, 2003 - Distribution Channel Commentary
# 12
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THIS WEEK’S TOPICS:
1. PRODUCTIVITY TACTICS FOR BRANCH MANAGERS – THE HANDOUT
2. SUPPLEMENTAL THINKING FOR INDUSTRY PRODUCT ANALYSIS REPORTS
3. RONA TREND RANKING REPORTS FOR BRANCHES OPENS MINDS, BOOSTS NEW
INITIATIVES – A CASE STUDY
4.
AN INTRODUCTORY OFFER TO THE BEST DISTRIBUTION MGT. NEWS LETTER
1. PRODUCTIVITY TACTICS FOR BRANCH MANAGERS, THE STORY, THE SEMINAR and
THE LATEST (E)-HANDOUT
As many of
you know, I started my career in wholesale distribution channels on a full time
basis in June, 1974. Upon graduating from Harvard Business School, I didn’t seek fame and fortune in
big time consulting or investment banking like 80% of my classmates. I took,
instead, the road much less traveled to Peoria, Illinois where I started as the assistant
branch manager of the Peoria Paper House, a distributor of both printing and
industrial paper products. The Peoria plant was one of six distribution
locations owned by a fledgling regional chain with big ambition called
Distribix.
It took me
18 months to help turn this chronically money-losing, lousy-service-reputation
business into a stable profit-maker that then became a platform for an
incredible growth story from ’76 on. In the meantime, the founder of Distribix,
to whom I reported, had bought a few more tired, old family distribution
companies that needed to be transformed. To this day I have never stopped
learning how to turn mediocre-at-best distribution companies into sustainable,
high performers for the benefit of all stakeholders.
Much of
what I have learned about distribution turnarounds over the past 29 years has
once again been re-distilled and re-packaged into an all-day seminar that I
will conduct on March 5th in Birmingham, Alabama as part of a
one week “University of Industrial Distribution.” The whole story is at www.univid.org,
AND anyone can sign up for it; you don’t have to be a member of one of the 20
trade associations that sponsor and promote it. The entire curriculum will work
for just about any type of wholesale distributor, not just the
“distributor-to-industry” subset that sponsors it. Is it worth it? Yes! It is
simply the best-value, finely-tuned, educational offering that has ever been
invented within the world of independent distribution channels.
But, if
you would like to first check out my handout, whether you attend or not,
please request it from karen@merrifield.com. We can send it to you in a PDF
file for free if you have broadband capability. If you would like a hard copy
snail mailed to you, that to is free IF you can credibly convince us that you
might further employ my services. Otherwise, if you send us a check or contact
us with a credit card for $15, you have a deal.
2. SUPPLEMENTAL THINKING FOR
INDUSTRY PRODUCT ANALYSIS REPORTS
The
magazine “Supply House Times” serves the plumbing supply distribution
channel. It is one of the oldest, best trade publications within the world of
distribution. Like many trade publications, it kicked off 2003 with an
excellent outlook report on a product segment that is vital to their channel.
The article is entitled: “The US Industrial Valve Marketplace” by Terry Helms.
For those interested, here is the URL:
http://www.supplyht.com/sht/cda/articleinformation/features/bnp__features__item/0,5333,89831,00.html
For
readers in the other 150+ distribution channels in which I have worked, when
you read your channel’s big product data reports, make sure you first surface
and write down your (unspoken?) assumptions for how you will grow your profits
in 2003. Because the assumptions that will work will not be (and can’t be) in a
report like our valve example above. To illustrate the importance of having the
right profit growth assumptions that will guide you to additional information
peculiar to your business that will make 2003 marketing programs successful,
here are some quotes from the valve report followed by my comments.
a.
“Growth
in the US valve market is elusive…even the experts can’t agree where the
opportunities are…there are some end-user industries showing promise…the
overall outlook is unfavorable….most analysts feel that 2004 will be the
turn-around year for the valve and actuator industry.”
Comments: This
channel’s general growth outlook isn’t much different than most other channels.
Things seem to be bumping along a bottom at the outset of 2003 waiting for
capital expenditure spending to return someday, maybe in 2004. For new readers
who keep hoping that this year will finally get better, you might want to read my
post-bubble economy management ideas in both our E-booklet and most of my
past commentaries. Specific DCC topic coverage on getting growth with
customer-centric strategies can be found in DCC #10 topic3,DCC #9 topic 2,
DCC #9 topic 3, DCC
# 7 topic 3, DCC #5 topic 3 and our video modules #ed: 3.1 - 3.7.
The valve article has nice tables on multi-year growth
trends in shipments by type of valve and by total valve shipments into
different, end-user industry segments. Don’t fall into the trap of allocating
more promotional effort towards the product sub-categories and end-user
segments with the most promising growth potential and trends. The majority of
your competitors are thinking and pursuing the same strategy. Ask yourself
instead these customer-specific questions:
1) “This is fascinating product-centric data, but in these tough times,
who are the 3 to 5% of my current customers that are generating a monstrous
percent of my profit before taxes? To defend them from all of our product-centric
competitors, what total-team, super-laser-beam focused effort should we lay on
them to sell them whatever old and new products and services they may need? If
they are bent upon putting all of our hard-won business out to bid, how do we
help them frame the analysis to include economic concepts like: “total
procurement cost” savings (not just bargain price for bargain service);
“switching costs to new suppliers”; and insurance premiums to cover unspecified
extra vendor resources to solve all forthcoming unforeseen problems and
adaptations? How can we re-invent, sell and get credit for our total economic
solutions before wrong-headed bidding even comes up? Prevention is usually
better than reactive fire fighting.
And, 2) “Who are the 3% of the
potential customers in each end-user segment that will generate 80% of the
future profitable growth over the next 5 years? Because these “gazelles” are
perpetual innovators that can actually execute ideas successfully, they will
continue to organically eat up share from the bottom 50%+ of the players within
their respective industry. What are we going to do on a total-team, focused
basis to partner these gazelles so they will then grow us faster than both the
industry and product category growth rates?
b.
“Most
projects call for standardized items produced by many manufacturers….the low
cost distributor usually wins.”
Comments: This is a
generally a true statement from the perspective of the bottom 90% of
distributors in all channels. According to Al Bates report on 8000+ distribution
firms from 40 different distribution channels, the bottom 90% of all
distributors are averaging 5% + for pre-tax return on total assets while the
top 10% average 15.4% (DCC 10.1). The bottom 90% talk about “good service” and
“getting paid for it”, but only the top 10% can actually achieve, sell and
get paid for it. They are the price makers, the bottom 90%+ are the
price-takers for whom the quote above is true. Modules 4.1 – 4.13 of our “High
Performance” video can help any distributor to : define, measure, achieve,
sell, get paid more for and partner with basic service brilliance.
c.
“We
see the best prospects for future sales growth in the market for more
sophisticated engineered products” (A valve manufacturing executive).
Comments: Spoken
like a die-hard, niche-product manufacturer. Perhaps they will be able to
someday come up with a breakthrough, high-end product. In the meantime,
however, I wonder if they couldn’t sell 2 to 3 times more volume on their
best-moving, cash-cow products through their best distributors by co-creating a
total-team effort to sell more to the distributors’ core and gazelle accounts.
When you are totally immersed in a 100-year old product/volume culture with
product managers and product data reports, it is hard to ask these kinds of
customer-centric strategy questions:
1.
What
are the five top distributor locations that sell our products?
2.
Who
are the top five sales reps working out of those locations that sell the most
of our products and why did they historically become exceptionally adept with
our products? (Warning! Don’t be shocked to find a lot of accidents of history
in which a sales rep coincidentally dropped off a brochure about some new
product for which they new very little to the ideal customer at the ideal time.
The rabid customer needs then forced the rep to become sufficiently masterful
about the product to then successfully and persistently sell it to a few other
appropriate niche-need customers in their territory. It’s a win the lottery
story; a freak set of conditions that created a product evangelist. How do we
turn the art and luck of such random successes into a more scientific, higher
probability marketing strategy?
3.
Who
are the top-5, most-profitable, important accounts for each of those five
locations that also buy a lot of our product, so that they are important to
both companies? What can we do to help defend and grow our share at those
accounts that love our product, love the sales rep and love the distributor?
Maybe those accounts will help us create new products and differentiating
services.
4.
Ditto
for mutual gazelle accounts at those five distribution locations.
If any manufacturers are concerned that the distributors
won’t share the account data and do joint efforts on such accounts, you might
generally be right. If, however, you go to the very best accounts and tell them
about your new, key-account, extra resource commitment that you would like to
allocate to the first 5 or so distributor locations as you work down your list
of prospects, you won’t have to go to far down your top 10 list of candidates
to find cooperative volunteers.
If your sales force doesn’t get it and balks at having to
do different types of selling, that is to be expected. People always want to be
in control and keep doing what they do. They confuse reactive, fine-tuning,
adaptive “learning” with breakthrough innovation moves and learning. Tough
times require new solutions and methods. Push the “wheel of learning”(VM #5.7);
make “good mistakes” by falling on your faces forward to new, next level
results (VM #5.8).
d.
(a
manufacturer) “sees the power sector as the ….single largest market opportunity
in the US today.”
Comments: That is
what all of the power companies thought a few years ago and bet the ranch with
big debt to: consolidate, de-regulate and open up new plants. Remember the
California shortages of two summers ago? Well, since the Supply House Times
article was posted in early January, a torrent of bad news has come out of the
power industry which seems to have developed a huge glut that may take several
years to absorb. It turns out that Enron’s 2000 off-the-books subsidiaries went
a long way towards inventing the big shortages of just a few years ago. I
wonder how many valve manufacturers and distributors have targeted the same,
now wrong industry? Nothing like lots of new foxes going after a shrinking
group of rabbits. Again, the viable core and gazelle accounts in the power
industry – all 2 to 4% of them – will always be good customers to team focus
on. Don’t delegate the upside potential in these accounts to a “good sales rep”
on the account. They won’t stand a chance against a total-team, full-court
press effort from a smart competitor.
3.
RONA TREND RANKING REPORTS FOR BRANCHES OPENS MINDS, BOOSTS NEW
INITIATIVES – A CASE STUDY
One of my
distribution chain clients has evolved an in-house “RONA trend ranking report”
for their 30+ branch managers and three regional managers that has sparked
real, positive changes. Here’s the history of what has happened so far:
1.
Their
RONA FORMULA? All managers in this company get paid on the financial components
that go into measuring “RONA” (return on net assets). This chain’s particular
flavor of the formula starts with the numerator being the “operating
profit before interest and taxes (“PBIT”). But, corporate allocation expense is
deducted before getting to the PBIT and half of the corporate expense is
interest expense for total corporate debt that finances every branches
inventory and receivables. So, the PBIT at the branch level is technically
closer to a “profit after interest, but before taxes”(PBT) figure for those
financial purists in reader-land. But, this chain figures that as long as their
chosen measurements are internally consistent and comparable it is OK. The denominator
is the sum of the average investment in branch inventory and branch
customer receivables using twelve annual data points for each asset item.
Because most of the trucks and warehouses are leased or rented, they aren’t
considered “controllable assets” by branch managers on an annual basis. So,
both their numerator and denominator are a bit understated compared to what the
chain’s overall ratio for PBIT/Total Assets might be.
2.
The
first RONA ranking reports from high to low by both branch and the three regions
were done and presented to all branch managers and regional managers for the
year 2000. This was a big step, because the bottom branches and region
were initially quite defensive. (For more on “internal benchmarking” ideas
and methods see our video modules # ed 5.3 to 5.6)
By year-end
2000, it became apparent, that the report was “interesting”, but not a catalyst
for new, more effective behavior. All managers professed to have the reasons
and excuses for their past performance and to have plans for improvement, this
really amounted to doing what they had always been doing with more vigor.
3.
For the year 2001 a few extra columns were added to the ranking report
including: GM%, “gross margin $s/full-time equivalent employee” and length of
tenure for the current branch manager. A fourth column was added by top
management in which they ranked the overall effectiveness of the branch and
regional managers on a 1 (worst) to 10 (best) scale. There was a close
correlation between high RONA and both the GM$/employee ratio and the
length/quality of branch managers at the locations. There was a slight inverse
correlation between RONA and GM%. The high RONA branches had more often than
not the lower GM%. It did seem apparent that the quality and longevity
of the branch manager at a given branch was a driver of both the RONA and
value-added productivity or GM$/employee ratio. Reducing turnover rates of
branch managers and some longer-term business skill development curriculum for
branch managers began to be discussed. The discussion of the report with
managers yielded the same “we know what’s going on, we are improving” comments
as the year before. New Year Resolutions were once again to do the same best
practice kind of things harder and better. Even though there was an inverse
relationship between GM% and RONA, many of the branches were working on “margin
enhancement (sell higher)” programs short on specifics.
4.
For
the year 2002 columns were added for the RONA scores from the previous two
years and guess what? The RONA scores for all three years had generally not
budged for most branches and regions whether they were at the high or low end!
There were a few exceptions where a branch had a bigger RONA change for which
top management could readily explain with a big outside change event, not
continuous operational improvement programs.
5.
This
raised some interesting questions like:
a.
If
everyone gets paid to improve their RONA’s and if everyone is working away on
improvement programs, why is no one improving? Are we working on the
wrong RONA improvement initiatives? Are all of our initiatives just incremental
fine-tuning efforts to a misunderstood, underlying business model? Are we
fussing with deck-top efficiencies without understanding why some hull and sail
strategies are causing consistently good or poor boat performance? If we keep
doing what we are doing inside the same framework of unspoken success
assumptions, won’t we keep getting what we are getting?
b.
Could
there be more random good luck and bad luck to how our branches grew up into
structurally and strategically more or less effective performers? Do we, for
example, enjoy at one location some really profitable account dynamics
(historical lucky breaks) along with weak local competition while another
location suffers from some very, unprofitable account dynamics along with
smart, tough local competition?
c.
Why
didn’t the managers with the best and worst RONA’s have any answers for these
questions.
6.
Next
came the discussion about the need to look at branch profitability in new ways.
Specifically, they took a look at some ideas from our video, “High Performance
Distribution Ideas for All” including: Ranking reports by customer
profitability (VM #3.5) to find out that there was a perfect correlation
between RONA and the average PBIT/customer. The lowest RONA branches also had
more, big loser accounts at the bottom of their reports. The highest RONA
branches had more, big winners out of the same common niche of customers at the
top of their report. A theoretical model was offered.
1) If more big customers from the same niche bought most of the same
one-stop-shop basket of items, then wouldn’t those items be more reliably
forecastable and flow through the warehouse on a faster, more regular basis?
2) Wouldn’t this allow the branch to have the highest fill-rates for that niche
in the competitive area?
3) Wouldn’t highest fill-rates create higher customer satisfaction and
retention with existing accounts? And would more potential customers within the
same niche defect from competitors who had lower fill-rates?
4) Wouldn’t higher fill-rates cause higher average order
size productivity for the branch? This would include lower: split-shipments
from other branches, back-orders and costly substitution and expediting
tactics?
5) Wouldn’t this allow the branch to attract more service value conscious
customers that would pay a bit more for good service?
6) Wouldn’t higher GM% allow for a better “turn-earn” productivity score for
warehouse business?
7) Wouldn’t all of these factors make it an easier, happier morale place to
work than a location that had all of these factors working against it?
Enough speculation! Want some more factual evidence for
these theories? The number one RONA ranking branch did have the highest
turn-earn product. It didn’t have the highest turn rate that dubious honor went
to a cost-plus, just-in-time OEM supply branch that had a very low GM%, a small
order problem and a very low RONA. The #1 branch didn’t have the highest GM%
either, that dubious honor went to a location that had a ton of will-call,
small contractor, small order business along with a low RONA. (Hmmm?)
None of the regional managers had thought of pushing old
or new ideas through to the bottom 80% of the payroll, the front-line service
providers who could theoretically sense-and-respond with heroic extra efforts
for best target accounts on a spontaneous basis. Except for a few detail
problems: know one, including the regional and branch managers, knew what
customers were the 5 most profitable or 5 most important strategically screened
target accounts by heart. Even if they all knew, the front-liners didn’t really
know the why’s and how’s of doing heroic extras for these groups of accounts.
All of these productivity plays and background educational needs were
fortunately packaged in bite-sized video training modules in the “High
Performance” video so that the total, unadulterated story could eventually get
to everyone on an affordable basis.
7.
So,
where’s the beef in 2003? Checking in with the CEO this past week, this is
what has happened in the first 6 weeks of the new year:
a. There is a higher, broader level
of open-mindedness, urgency and optimism for trying new things amongst most
of the operational managers; the flat RONA trend numbers served as a wake up
tool. No one was touting same old programs that had been guided by
conventional, financial assumptions like: sell high, buy low, sell more ____
(fill in a product promotion here). Nor was anyone using the same old excuses
for why RONA’s hadn’t improved.
b. One regional manager got to work
immediately on personally renegotiating contracts with about 20 of the biggest
losing accounts in his 10-branch region. Based on the first few calls, audits
and proposals, he thinks he can double his lowest, regional RONA in 6
months. Nothing will improve RONA’s faster than turning “lead accounts into
gold ones.”
c.
All
branches have discretely posted their top 5 or so core accounts and agreed on
who their gazelle target accounts are for the total team-sell, full-court press
treatment.
d. Are all managers buying into new
thinking and trying new things evenly? Far from it, breakthrough changes for
breakthrough gains take great change management skills and different time
lengths for different types of people (VM #5.1 – 5.13). This chain figures
that they are way ahead of the competition.
e. Things are looking up! New ideas
are getting traction.
4. AN INTRODUCTORY OFFER TO THE
BEST DISTRIBUTION MGT. NEWS LETTER
If you are
looking for the most focused, insightful, timely stream of what’s going on in
distribution channels, the best search engine on the planet is finding the
right value-added guy who isn’t beholden to one distribution channel’s
advertisers. That guy is Tom Gale who is the owner, publisher and editor of
“Modern Distribution Management”(MDM). His biweekly newsletter has been one of
my main informational and educational resources since 1979 when the founder and
Tom’s predecessor, Van Ness Phillips was cranking it out. Whenever I write a
formal article, I always try to get Tom to publish it first because he has the
biggest, smartest subscriber base.
MDM’s
historical focus has been on the distributor-to-industry, sub-set of the
independent distribution world, but Tom has interesting plans afoot which bear
watching and evaluating. Because a majority of my readers are outside MDM’s
traditional scope of distribution, I persuaded Tom to offer you a special
introductory exposure to what he has been doing.
Here’s the
deal! You can get free, complete access to news, management articles, data and
a few years of archives about wholesale distribution by emailing chris@mdm.com.
In that email, please choose and include a password (min. 6 characters), your
email address will be your username. Or, you can just call Chris at 651-771-2540,
and she will get you set up. All you have to do is mention that you want the
“Merrifield introductory offer.”
After you
have reviewed what’s there, you will have to decide whether you will be able to
get the “one good idea; the one great how-to article; etc.” that will return
many times your annual investment in this service. The service costs $245 a
year for 24 issues. This allows you to have either the online version or the
paper-based mailed service or both with no need to save the paper, because the
searchable archives are always there!
I believe
this offer may expire at the end of February, so jump on it today.
CLOSING
For those
of you who have gotten this far, thank you for your interest! Please spread the
word about this service and help us to build our list until our new web site
gets going. Be back to you next week!
Regards,
Bruce
