December 18, 2002 Commentary # 5
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RE-PURPOSING COMMENTARY CONTENT ON
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answer is “yes.” What is the possibility?
YEAR-END THEME: CHANGE “CHANGE
MANAGEMENT”
This is
the third of three commentaries that have been stressing ideas for doing things
better in 2003. (Think: “What’s our corporate New Year’s resolution that’s
going to happen this time!”) Calendar year-end companies do a lot of reviewing
and re-planning in December. If your success rates for 2002’s plans fell short, then we hope our
intellectual food for thought might help.
THIS WEEK’S TOPICS: (next
publication 1-8-03)
1. READY FOR YEAR FOUR OF THE POST-BUBBLE ECONOMY?
2.
“DOWNSIZE, UPGRADE..” = TWO FIFTHS
OF THE SUCCESS FORMULA FOR 2003
3.
APPLY “APPRECIATIVE INQUIRY” TO
YOUR #1 HISTORIC, STRATEGIC NICHE
1. READY FOR YEAR FOUR OF THE POST BUBBLE ECONOMY?
Because we are unconsciously biased to see (hear) what we
want to, you might check to see which of the following forecasts that range
from OK- (the best I could find) to Grim.
a.
12-16;
Bloomberg News survey; “U.S. Economy Growth to Accelerate in 2003 2nd
Half”
“The GDP may expand 2.8% in 2003 up from this year’s
projected 2.4% growth. Growth will accelerate from 2.5% in the first quarter to
3% in the second quarter to (eventually) 3.7% in the fourth quarter. (This is
the most optimistic forecast that I have seen.)
b.
(12-12;
“World Bank Warns of (global) Recession” http://www.nationalpost.com/financialpost/story.html?id={66D12D1C-B4D9-405E-8660-255A5399D582})
“The global economy faces a significant risk of sliding back into recession in
2003…the Washington-based lender to third world countries slashed its global
growth forecast to 2.5% for 2003 down from 3.9% just six months ago. After
growth of 1.1% in 2001, the bank expects growth of 1.7% this year.” (The World
Bank considers 2% or less a “recession”, because both productivity and
population growth rates will support a higher global “output capacity.” Net new
jobs are not created globally until the growth rate goes past 2%; they shrink
below 2%.)
c.
11-22:
“Bear Trap?” by Stephen Roach (Disclosure: he’s one of my favorite economic
gurus!)
http://www.morganstanley.com/GEFdata/digests/20021122-fri.html
“The S and P 500 is now up 20% from its October lows (and
has since drifted downward), little different from its two preceding rebounds –
21% recoveries off both the 9-21-01 low as well as off the 7-24-02 low. In each
of those two earlier instances, there was hope that meaningful cyclical revival
was at hand…(but) another rally falls victim to lingering weakness in the US
economy…..As I see it, the US economy remains stuck in a subpar growth channel,
at best – with real GDP growth averaging around 2%…restrained by the headwinds
of excess debt, subpar saving, excess capacity, a massive current account
deficit and the lack of pent-up demand, there is a compelling case for a
persistently subpar recovery, in my view.”
d.
12-18-02
“Best of Bill Buckler”
http://www.investmentrarities.com/thebestofbb12-18-02.html
A short, hard-hitting, fact-based analysis of the huge
money supply inflation that the Fed has orchestrated, especially over the past
7 weeks, to cause an incipient dollar devaluation crisis along with the
implication that it will not revive the economy.
Of the four above, only Roach has
had accurate forecasts going back to mid ’01. The rest of US economists in
general have been significantly and optimistically wrong for three years. Most
still are using rear-view mirror models based on interest rates and money
supply effects since WW2. They don’t focus on the global debt load/exhaustion
problem and the chronic excess capacity problem in manufacturing caused by the
super-fast, unprecedented ascent of China.
Now, let’s blend in some late
breaking news mixed with some commentary:
a.
12-17
Industrial production was up .1% in November. Factory usage was at 75.6%
capacity. (The worst reading for capacity utilization was in December 2001 at
74.6%, an 18-year low. 1% improvement in a year? Aren’t we supposed to be
cutting our “excess capacity”? Sure. But, what if as fast as US manufacturing
capacity is being closed, new more efficient, copy-cat capacity is being
created in China for US export? High-wage factory job lay-offs have continued
steadily for the past 30 months. These folks may have found new service jobs at
much lower wages and benefits. Here’s an equation for what’s going on: BIG
PERSONAL DEBT + LAYOFFS = CONSUMER LOAN DEFAULT rates increasing steadily into
the future.
b.
A
Merrill Lynch study concludes that consumer spending will continue steadily
into next year when commercial capital expenditure will finally take off.
Spending power exists, because cash-out, refinancings of mortgages is still
happening. But, what if and when will the consumer decide to use the proceeds
to pay down more expensive credit card loans and have a cash cushion. Are there
signs that the consumer is finally starting to save? If so, it could keep the
economy quite cool in 2003? Auto and retail sales look foreboding. (below).
c.
12-17
GM announced that it would be forced to cut production by 400,000 cars next
year. It appears that cars have piled up on dealer lots because year-to-year
sales in the fourth quarter are off 11% in spite of the fact that
zero-zero-zero financing schemes are cutting average prices by over 11% more
than last year’s fourth-quarter, “zero interest” deals. Zero-cost financing has
also been prevalent in the furniture, appliance and electronic goods channels.
Are fourth quarter consumer sales (as anemic as they might be) being stolen
from 2003 sales?
d.
Let’s
look at this week’s retail news. Wal-Mart reported that sales last week were at
the low end of their forecast. This suggests to me that most higher-priced
stores could be doing worse. McDonalds will report the first loss ever after 8
straight quarters of declining profits . FAO (Schwatz) is threatening
bankruptcy with their bank (Wells Fargo). Best Buy reduced their fourth quarter
forecast. Circuit City posted a third quarter loss due to price cuts and sales
of fewer higher margin goods. K-Mart’s stock sank to 25 cents per share and
went to the pink sheets; it’s closing stores rapidly and trying to find a niche
with minorities. Target said its December sales were below expectations. Even
(grocery, gotta eat companies) SuperValu and Albertson’s reported profit
declines for their latest quarters because of deflation in their product lines
and price competition from Wal-Mart supercenters. Where will the US economy get
the demand stimulation it needs to get going in 2003? (next point)
e.
The
Fed and Fannie Mae are doing their best to promote evermore borrowing and
consuming our way to prosperity financing schemes. Federal Reserve governor Bernanke
stated on Nov. 21st that: "The US government has a technology,
called a printing press or today, its electronic equivalent that allows it to
produce as many US dollars as it wishes at essentially no cost.” He then went on to tell how the Fed would
do whatever it would take, including the production of US dollars, to avoid
deflation and to keep interest rates low. Is it any wonder that the price of
gold has since taken off while the US dollar’s relative value to other
currencies has started to drop. Will all the cheap, extra money creation keep
flowing into housing stock, the last great asset bubble? (For more on the
housing bubble topping, see commentary topic #2 – 2) Fannie Mae and the entire
mortgage-industry food chain have been conspiring with tract builders and sham
charities to keep the low end of the housing market going. FHA approved house
deals require a 3% downpayment that builders are forbidden to contribute. So,
now they give the money to special charities that in turn give the down payments
to would be buyers. The charities even have a trade group with the acronym
“HAND.” Delinquent payment rates are now exploding. To read about this
financial train-wreck on its way to happening that tax-payers will underwrite,
go to this URL: http://www.safehaven.com/Credit/Credit121302PF.htm.
I could go on, but what’s my final take? I agree with
Stephen Roach above. I think that the US economy will continue to muddle along
at a rate that is below its “output capacity” which means rising unemployment and
consumer default rates on loans of all sorts. There will be continued deflation
in manufactured goods and no pricing power in the physical goods channel.
Distributors could re-invent themselves operationally to achieve superior
service economics power to improve profitability and growth through better
retention rates of best customers. But, most will try another round of
financial cost cutting. Can multiple rounds of “downsize and upgrade” cost
cutting work in service businesses over several years? Two big concerns that
come to mind are: 1) Morale and losing the best, young people. If we keep
cutting back the oats on the horse (our employees), then the horse will die or
our best, young employees will leave first in spirit and then in body. Overpaid
veterans who have been coasting for some time and weak employees who have no
next best alternative will stay and increase their passive aggressive behavior.
And, 2) how is cost cutting creating any sustainable, competitive, unique,
value-added edge or exploring new living edge opportunities to replace old
profit streams that are drying up? If more than one player in the market cuts
costs to have a little crummier service, then any savings will be competed
away, because price will be the only differentiator for two or more players
with me too products. A more complete success formula for a corporate New
Year’s resolution follows.
2. “DOWNSIZE, UPGRADE (+) REFOCUS, RETHINK AND REVIVE” IN 2003
In tough times,
I believe that you can only once – freeze wages; lay off some marginal
performers to upgrade the average quality of who remains; cut discretionary
expenses (investments?) like dues, travel, education; and preach try harder
until the (3 to 9 month) recession passes. If you do it again the next year
without some big picture education and re-thinking for all employees to give
them some intellectually sound new solutions, then the depression, anxiety and
loss of confidence in leadership sets in. It’s a lucky thing owner-operator
CEOs can’t be voted out of office when the misery index gets too high for too
long.
Here are some
highlights for the last, usually missing, three steps for a turnaround revival
at a distribution location:
“REFOCUS’ (on most profitable
stuff). For ideas on refocusing on what a company does best and most profitably
bag the financial management and product pushing strategies and focus on
customer profitability applications. For more on this order our free E-Booklet
and check out articles numbered 11 through 14 on customer profitability.
If you would like other
perspectives on customer profitability, read Brent Grover’s article entitled
“Think About Your Customer Investment Portfolio.” It’s in the latest issue of
Modern Distribution Management (12-10-02 issue; www.mdm.com). Or, we have his permission
to email you a copy of it in a word document file if you contact
karen@merrifield.com. If you want to invest further in activity based costing
software for a distribution environment, there are two products that I know of
out there. One is a windows application entitled “Customer Profitability
Analysis” (CPA). It is authored and sold by Stephen Pearce
(spearce@acpscm.com). The other is an ERP-add-on application by Acorn Systems
(http://www.acornsys.com) which they sell through ERP distribution software
vendors like NxTrend, IDS, Tecsys and Daly.commerce. (For yet more on the
“refocus” step, see topic three below).
RETHINK involves a lot. Here are some suggestions with
references.
1.
Question
many unspoken, flawed operating assumptions with the management team,. Do this because
total management team buy in is vital before sharing the overhauled, updated
beliefs with the rest of the employees.
2.
For
an agenda of assumptions to discuss with the management team read through our
E-Booklet. Most of the advice will seem dramatically different from past
operating practices, but why not? No company is going to get big gains without
big cumulative change starting with management thinking.
3.
Just
for starters realize that 100% of high performance companies are “open book” with
all employees in order to make them more educated, responsible and continuously
improving. If you can’t score what you are doing and what’s in it for you, then
you sit and do only what you are told. Read E-Booklet articles 9, 8 and 6 for
more.
4.
Cut order error rates by 50% within 1 month
with the ideas in article #3.9 “TQM Resuscitation Tactics” located under the
“articles” tab at www.merrifield.com.
5.
Make
it all happen in a credible, affordable, bite-sized discussion way with our
guaranteed, turnaround-revival solution in a box entitled “High Performance
Distribution Ideas for All.” It is most affordably bought through one of our
re-sellers (they are in the E-Booklet). To quote a happy distribution
executive: “It (the video) is the best, cost-benefit, slam-dunk,
transformational catalyst we have ever seen”
REVIVE every (competent) employee’s hope that:
a.
They
can personally become more in control of their job’s destiny and economic
expectations as well as the company’s collective well-being.
b.
They
can make a direct and indirect service excellence difference as far as cracking
and improving target accounts.
c.
Selling
more core products to core customers and best target accounts can really
happen.
d.
Free-riders
or cross-subsidized employees will either shape up or out.
e.
Of
course, the subsidized employees will be stressed by the new, transparent
culture and either get with the program or leave opening places for a new breed
of recruit-able employee.
For some key articles that support this step, go to
www.merrifield.com and check out #s:
5.12, 5.10, 5.7, and the rest of section 5. We also
recommend our audiotape product, “Hiring, Training and Keeping the Best
Employees” which is 6 hours of me talking at my usual 300 words a minute with
gusts up to 450. It was made from an all-day seminar that I did on the subject
in the early ‘90s. It only costs $95, and it gets rave reviews, especially from
execs with a lot of drive time.
3. APPLY “APPRECIATIVE INQUIRY” TO YOUR #1 HISTORIC, STRATEGIC NICHE
How should a distributor define
their “historic, #1 best niche”? It is where the firm makes it most money at
the intersection of the most profitable products being sold to most profitable
customers. These customer-product combinations will generate up to 150% of a
firm’s profits to then cross-subsidize all of the losing products and customers
that we all know we have. Unless a distributor has an exclusive franchise from
a manufacturer that assures them of making money even if they are a bottom
20%-ile operator in an inherently poor market location, the logical, primary
driver of profits is a group of homogeneous customers. This group will buy a
similar assortment of best moving products in large, frequent quantities with
semi-automated, routinized methods on both the buy and sell side.
How can we more precisely define
this group of customers? A simple customer profitability ranking report based
on transaction cost assumptions is sufficient. For more specifics, see
www.merrifield.com article #2.3; the E-booklet articles #ed 11-14; and for the
most detailed analysis and action plan ideas: video modules #ed 3.5 – 3.11.
Further profitability analysis on
an individual product SKU (stock keeping unit) basis can help. Rank all items
by total volume sold out of the warehouse with additional columns for: average
inventory balance, turns, est. GM% (a guesstimate plug in) to then calculate
the last two columns for estimated annual gross margin $ and “turn x earn”
product. As an embellishment to the customer profitability report it would be
interesting to port in columns for the total number of picks, lines and/or
lines/ transaction for every customer. Customers who buy a high number of items
per invoice receive a much better total procurement cost benefit from a
distributor than a customer who buys just one item. The more items a customer
buys from you, the more they should want to buy from you if they have other
miscellaneous suppliers that you might consolidate out of the account. These
customers also have very disciplined internal replenishment systems in contrast
to accounts that have lots of rush order requests, because their reorder points
are zero-and-I-need-it-now!
What customers are we ultimately
looking for? Within the top 10+ most profitable customers, we should be able to
identify a homogeneous sub-group (rarely two such groups) that is buying a lot
of our most frequently requested items. Once we can identify and personify such
a vital group, then we can do what we have been doing with them and others like
them much better.
For specifics on how we should:
a.
Re-interview
these most important customers;
b.
Re-define
more precisely exactly what “perfect service” is for this niche;
c.
Identify
new items that they all buy from miscellaneous suppliers that we could stock in
order to further consolidate their total procurement costs;
d.
Use
them as on-going advisors for all of our service value-added ideas;
e.
And,
use them to personify the niche to all employees in a motivating and
educational way-
see www.merrifield.com article #ed 5.8 and video modules
3.1 to 3.4.
3. A
CHANCE TO USE “APPRECIATIVE INQUIRY”
“Appreciative Inquiry” is an emerging body of soft
business science that takes the idea of “feed the winners and ignore or starve
the losers” to an exhaustive level to insure successful implementation of ideas
that you know should work, but don’t. For some background research on the net,
here are two starter site URLs:
www.appreciative-inquiry.org and www.thinbook.com (a One Minute Manager
style of book selling site).
Here’s most every distributor’s opportunity. If all
employees could know:
a.
Who
the most important profit-generating customers are;
b.
Why
these customers are so profitable;
c.
Why
their profitability is so important to all employees;
d.
What
the employees can do to specifically and consistently to keep them, grow them
and get more customers like them;
e.
And,
why doing any new activities will be relatively easy and involve the most
cooperative, appreciative group of customers –
THEN, don’t you think that the employees could get sufficiently
excited about being part of this new, improved solution that the odds of
success go way up! (?)
Read more on AI and see if it isn’t
a methodology that will help your company do what it does best a lot better
assuming you know which #1 niche to work with first on what specific
opportunities.
That’s all for this week. We will
back in the New Year. Happy Holidays!
Bruce
Merrifield
