July 2, 2022

Article 5.13


Where is the recovery for the current economic downturn? Some distributors are in channels that have already been in recession for a year. Most other channels are now in the same boat. Distributors with significant debt saw their operating profit hammered by higher interest rates throughout 2000. They are now getting interest rate expense relief due to the Fedís interest rate cuts since January, but those "new" savings may only cover huge increases in medical insurance premiums this year. And, forecasts for a recovery keep being adjusted further in to the future.

The V-shaped recovery that the average economist was forecasting in January to start in June has been postponed first to the fall and now to the fourth quarter. The on going effects of deflating the biggest stock market bubble in history as well as digesting the biggest excess capital expenditure overhang since the railroad bust in 1870 seem to be causing an L-shaped non-recovery.

Will L-shaped recession strategy measures be any different than those for past recessions? Most distributors have already pushed the routine recession buttons - freeze hiring and wages, stop ALL discretionary spending, expect incentive pay to drop and wait for the recovery. Some smarter, more proactive firms may be doing some strategic, downsizing of unprofitable customers, products and employees. But, maybe this time around a prolonged slump and weak recovery will force many firms to rethink their flawed, unspoken operating assumptions and address their biggest, in-denial profitability problems?

"Excuse me, Bruce Ė flawed assumptions and in-denial problems?"

Yes! Here are some reality-check statistics followed by some tough questions for the 90% of all distributors that arenít in the top 10-percentile, financial performer category.


In 1999, before the current recession hit, the median IDA distributor had - gross margins of 24.8%, a profit before tax (PBT) margin of 1.6% and a pre-tax return on net worth of 10.6%. The top 10-percentile companies, 14 out of 142 firms reporting, had the following average statistics Ė 32% gross margins, 7.7% PBT and 61.5% pre-tax return on net worth. The median distributor had $8 million in sales, the top 10% had $11 million, a sales volume difference that can not account for 5 to 6 times better profitability rates!

What could the top 10% be doing differently?

  1. They are obviously "selling higher" with a 32% gross margin rate which would suggest that they have figured out how to measure, achieve, sell and get paid for basic service brilliance while most of the other 90% havenít. The rest appear to be price-takers. Neither they nor their customers are convinced that they have a better total service value to offer at a higher comparative price than a mediocre service competitor.
  2. Perhaps the rest are still making 20 to 70 errors per 1000 line items processed in the warehouse which would give them - higher operating costs, lower service value and lower morale. Remember Phil Crosbyís "Quality is Free" book from 1979? He estimated that the average service firm spent 40% of the total payroll cost on "non-compliance" activities, a euphemism for mistakes. The top 10% have probably figured out how to achieve "do it right the first time" economics.
  3. The top 10% canít be selling big, money-losing contracts at low margins to have a 32% average gross margin. Why havenít the bottom 90% figured out how to measure customer profitability and then have the courage to tell losing customers that the relationship must be win-win (profitable to the company) or the customer must leave to paralyze the other 90% of the competitors who donít know any better? Better to lay off the least productive employees in parallel with driving away losing volume activity. Then, a smaller, better executing and more profitable business can serve as a platform for the right kind of growth. Be everything to somebody instead of selling a little bit of everything to everybody.
  4. A company canít achieve, sell and get paid for distinctive service excellence if all the employees donít have their hearts, minds and wallets wired into the high performance cause. How should the 90% analyze and totally overhaul their culture to get everyone signed up to embrace the right assumptions and pursue the right roadmaps towards Ė do it right the first time economics, solving the unprofitable customer and small-order problems, and being able to attract, keep and sustainably motivate employees?

If management is tired of working hard and making less, then "Downturn 2001" may be the catalyst for some to take another look at high-performance, service management ideas. MCG has packaged them all in a forthcoming video which is formatted for and priced to educate all employees on the whyís and howís of becoming a high performance company. Check out the video material at www.merrifield.com. If we canít educate all of the employees in our company to become a motivated part of the profit building solution, than they will unwittingly continue to be part of the problem.

Merrifield Consulting Group, Inc.

D. Bruce Merrifield, Jr.

Article # 5.13

July, 2001