July 3, 2022

Article 1.8




            A well known distribution trade journal polled wholesale distributors (WDs) within one channel about their plans for 1994, the results were summarized in a mid-year article. The survey’s 10 most frequently mentioned activities, which follow, may serve as a rough agenda for what many types of WDs might also be pursuing.

            The 10 activities are reviewed below under three general headings. The survey ranked activities by the percentage of respondents who planned to pursue them; this data precedes each “activity.” The editorial questions and comments may help with the planning process for 1995.



            #1; 54% - “diversify into new products and customer segments.” What about “sticking to the knitting” - dominating one niche of customers at a time to be the low-cost, volume producer for that niche while also being the focused, high value provider? Grape Nuts has only 3% of the total cereal market, but it owns the adult, crunchy texture, health niche. Post, who makes the cereal, is small in the general cereal industry, but Grape Nuts is its star performer.

            If we are mediocre within existing niches, what should we expect to be in new segments? Will pursuing greener pastures further weaken our core performance?

                #3; 35.5% - “add more outside salespeople.” For over a decade, big-buyer, customer surveys have concluded that; “there are too many salespeople calling on us too often and 90% (in '93) are not worth talking to.” Should we find out in great detail from our biggest customers what a “10” salesrep does and field only the best? Should we experiment with empowering some customers by offering them the options of  unbundling the rep and perhaps other basic  services in exchange for much lower prices? Selling commodity products for an unbundled, low price with all basic and many extra services available for a fee is a gaining trend. Should we start to experiment with this concept?

            What should we do for the small, marginal and lonely customers who will reward any face-to-face salesrep with orders just to have some company? The margins that these accounts generate are less than the full-service cost of taking care of them. Most WDs already call on too many of these accounts. Should we let the competition weaken themselves by over-servicing this segment of customers while we steal their best accounts with fewer, better reps supported by more available and focused organization?

            #4; 34.4% - “add more inside salespeople.” Assuming that more “feet on the street” works (#3), then the logic might be that more order fulfillment people will be necessary too. Where is the efficiency, the effectiveness or the transformational economics in adding more people to support more traditional growth? Don't we need to figure out how to grow the ratio of annual gross margin dollars per employee to be able to afford to pay more (and make more), to hire better employees who are necessary for best service?

            What about customers faxing in orders with code numbers for a functional discount, and then coaxing them to enter orders electronically into our computer for an even bigger discount? As long as we reduce our costs first and more than we lower the price, both customer and company win. Full-service restaurants find that a significant segment of customers opt for the buffet over the menu if the restaurant splits the savings with the customers. We get twice the food in the portions that we want for less money, and they get more revenue and margin per employee and square foot.

            #6; 17.6% - “build or modernize warehouse facilities.” Why? “Because if we are to grow, we will need more space, and maybe we can improve warehouse cost efficiencies too.” Are there any economies of scale in distribution? It seems that all costs including the warehouse are variable. At what point could human dis-economies of scale set in? Although there are exceptions, the largest distribution chains average a lower return on investment than the average return for the rest of the firms in most channels of distribution. Should we strive to get better first and then bigger?


Article 1.8


            To free warehouse space should we consider fast-flow replenishment systems (AKA – “quick response, efficient consumer response”) with our top five suppliers? If we gave them an “open-purchase order, vendor managed inventory responsibility” along with daily sales data for their items via EDI, then they could top off our inventory more frequently. These schemes can typically double turns which will free space, improve fill-rates and drop total procurement costs by about 10% - a “transformational” opportunity!


            #7; 15.8% -“open additional locations.” If we are mediocre in one or more of our existing locations, how good will we be in a new location? Won't new locations drain away scarce resources from achieving excellence at existing locations? Isn't there too much distribution capacity in America already? Alternate discount channels are adding capacity and taking volume share. Does each new location face a declining chance of eventually dominating one or more local customer niches?

            Is there anyway that new logistical partners could help us to extend the reach of our existing warehouse(s)? For example, the logistics divisions of FedEx, UPS, Airborne, etc., allow a warehouse located at their hubs to serve the nation for about 70% off their normal delivery rates. How? 40% of the normal rate is the cost of shipping goods to the hub; 20% is for going through the hub; and 40% is for shipping to the customer. If we commit to big volumes of orders to be delivered straight to their outbound vehicles, we bypass 60% of the normal rate charge and negotiate the rest. Even if 70%-off rates are still higher than normal ground shipping costs from local warehouses, there are offsetting benefits. We co-brand ourselves with an earlier, on-time, reliable carrier. We can turn one inventory investment with a national base of demand which is great for slow moving items. And, a 3 AM cut-off for 10 AM delivery is a possible emergency service niche that can be explored.

            Are there yet other outside trucking partnerships that might extend the reach of our current warehouse(s)?



            #2; 52.7% - “tighten credit policies.” Considering that about 50% of all existing businesses won't be around by the year 2000, this might be a good idea. But how? Most credit management involves remedial collection measures instead of upfront, selective, preventative measures. Will our growth obsession have us selling too many types of customers as well as too many marginal ones?

            Why should opportunistic customers pay on time unless we have something that they really want repeatedly and can't get elsewhere? Because everyone has equally excellent commodities that are guaranteed, brilliant service is the only edge. Best service providers can be successfully aggressive with trade credit policies. Mediocre service firms have nothing else to differentiate themselves with but price and terms.



            #5; 19% - “work with fewer vendors.” Applying the same volume of purchases to fewer redundant vendors lowers most elements of total procurement cost - price, shopping time, paperwork, and holding costs for more efficiently turning inventory. It also allows for improvement in fill-rates for customers. These improvements will not be maximized, however, unless they are truly understood and measurably pursued by purchasing personnel. Successful implementation will also require salespeople to sell what is stocked instead of every redundant brand that a customer might request. Can we do this?

            Vendor reduction can be taken a transformational step further by re-engineering the buy-sell relationship with the largest, best suppliers (see above). Any supplier who is already selling “quick response” users like Lowe's, Wal-Mart, WW Grainger or Pep Boys is working on or has already changed their selling process to be part of a quick response system. Should we ask them to do it with us too?


                #8; 15.2% - “install an in-house computer system.” Information systems are powerful tools in skilled hands directed by smart, focused strategies; otherwise, they can automate and accelerate decline. “Infotech” is now changing so fast that it will be appropriate to overhaul systems every three years. Many larger WDs who have traditionally developed their own systems are turning to independent software firms to cope with rapid change.

            There are many excellent software packages for managing the past with fine-tuning, feature overkill. But, can we find or build a solution that will also allow us to compete in the world of “electronic commerce” that is already taking off and will be generally noticeable by January, 1997. Do we have a detailed, management team view of how our industry will look 3 to 5 years out?

            #9; 11.8% - “weed existing product and customer segments.” Too bad 88% of the respondents didn't realize that this activity is a top priority. Instead, the #1 activity was adding more products and customers which will dilute focus and accelerate mediocrity.

            Ranking both customers and products by estimated profit contribution exposes the sensational cross-subsidization that exists between winners and losers. Most firms will discover that the best 20% of their customers generate 120% (+) of their operating profit. This surplus is offset by the worst 5 - 10% of the customers who are big losers. The remaining customers are breakeven or close to it.

            Do we have the courage to say to the losers – “win-win or no deal?” Can we shape them up or out to free scarce resources to better focus on our best customers and other targets like them? “Weed to feed; prune to grow?” Doesn't firing customers go against the dogma of the 1946 to 1981 period? Sure, but times have changed. Now we need to be everything to the best within a niche instead of trying to sell a little of something to everybody.

                #10; 11.4% - “buy more from master WDs.” Another under-realized opportunity! One-stop shopping assortment and the highest fill-rates around are today's top two reasons why customers buy from WDs. If it is out of stock, everything else doesn't matter.

            Here is a customer-needs driven idea. Pick 2 to 5 good customers who personify the heart of our #1 niche of customers and ask to review all of their purchase orders from other vendors to see what they haven't been able to get from us. When we discover 10 to 100 additional items that they all have been buying from miscellaneous vendors, then we could stock them and help customers consolidate vendors and procurement costs.

            But, we might explore buying these items in case quantities from some other type of volume wholesaler. Our margin might be cut in half, but the turns will probably be 3-5 times higher than  normal with 99% fill-rates to boot. We get a better turn-earn, more business, and we further position ourselves as the best total service provider for our target niche.

            Applying the same turn-earn logic, small distributors in any channel should consider buying many items from larger distributors who are either in contiguous cities or who don't go after the same niches. Instead of being obsessed with buying direct to maximize margin percent (and inventory!), maximize turn-earn, fill-rates and one-stop shopping.



            Traditional sales-volume planning won't work in a super-saturated supply, mature demand economy. We must question unspoken, dated assumptions and develop new theories for how to continue to succeed. Most WDs must first refocus, however, on their core niches and become top decile, service-value performers for them. By being better first, we can then grow sales and profits as a by-product and have the credibility to propose marriage to the best customers who will in turn grow us.


            As we reinvent our past ways of doing business, we must also work to see the future better and first. If we don't start the preparation work for creating new future profit streams which will be built primarily on unbundled services for fees, then we will be in trouble as our traditional product-based profit streams dry up quickly due to channel re-engineering and electronic commerce.


ãThe Merrifield Consulting Group, Inc. Article 1.8