A Chain Rethinks Marketing Around "Old-To-Old" Matrix
This story all started in June í76. There was a separate, but related problem that I was also working on which became known as the "small order opportunity". The entire thinking behind and the tactics for solving that problem are covered in "section three" and more specifically, modules #-ed 3.5 Ė3.11, in our video-based transformational training program entitled: "High Performance Distribution Ideas for All". Lots more on the video, its resellers, etc. is in the center of our home page at www.merrifield.com.
Now on with the story about old-to-old marketing.
I had learned in my first 18 months at this chain that trying to lead change from the middle of the organization chart was a patient, humble process. As a 26 year-old staff guy with no direct-line authority over those to whom I was writing, I didnít expect a big initial reaction. Experience had taught me to be prepared for diplomatic disinterest and some conventional industry wisdom rebuttals. The new, data-supported, trend analysis would do the tough talking. I would just ask thoughtful, provocative questions looking for one to a few innovative-minded managers to raise their hands.
If I could find one or more division managers willing to do some experiments, then I could patiently keep publishing comparative division metrics along with the learning progress and hopefully improved results from the experiments. If my thinking, metrics and experiments all proved to be positive, then the rest of the management teamís collective perceptions might change after about 5 to 7 progress reports.
Here are some of the points and questions that I raised in the memo:
- In the case study it appears that it was 5 times harder for the sales force to crack a new customer than it was for them to effectively sell a new product. Is it the same for us? The trend numbers for key account penetration for all new and most mature sales reps is not encouraging. Should we improve our account cracking team skills, strategies and incentives from our normal selling methods for all territories in which reps havenít been successful? Shouldnít we put rookies on smaller, maintenance accounts that are hived-off from the few reps who have a track record for big, new account development? What might happen if we then supported our account crackers with a special total-team selling approach, extra service heroics and an extra, company funded expense budget?
- Shouldnít we be systematically exhausting all of our old-product-to-old-customer possibilities before we do anything else? What new information tools and selling methods would enable us to do this on a measurable disciplined basis?
- The case study mentioned only top-line sales growth. It didnít mention how much of the incremental sales dollar would flow immediately through to the bottom line. If one of our customers did buy more incremental, old items on a larger order size basis, we would get a bigger gross margin payload for the fixed cost of the transactions including the delivery cost. Fixed transaction costs are big, especially for freight-sensitive, low-value-per-pound goods. How much of the incremental margin dollars would flow through to the operating profit line? I figured 50%! Do you agree?
- If we want to defend our best accounts, could a new value creation offense be the best defense? Isnít finding mutually overlooked old items to sell customers who are already trying to consolidate their purchasing and purchasing costs with us a big win-win economic? How could we design a database that would allow us to generate what kind of computer report of best, most likely, incremental, old items to review with each customer? (See note #2)
- The bottom 50% of our stocked items ranked by sales activity are only averaging about 1-2% of our warehouse sales across all locations. Does this suggest that we could do a lot better job at selecting fewer, more promising new products to sell more thoroughly to more carefully pre-targeted customers who said they would like to buy them from us? Does our historical batting average on new products suggest that we should significantly reduce our rate of adding new items until we can learn lessons from our dust collecting cash traps in inventory?
- Could we also have a huge dead inventory investment that is junk that we bought with the acquisition? Did we know what percent of the inventory was actually worth scrap value when we did the deal? Did the former owners? Could we structure our next deal based on different valuations for different classes (A,B,C,D) of inventory items calculated by our system after the deal is closed? We should probably write off the dead items based on tax and bank-loan considerations. We might exempt inherited dead write-offs from operational profit bonus calculations, but should we start measuring, timing and writing down new item fizzles on a regular basis? Then, we could learn what our true profitability, book value and marketing weaknesses are much sooner and avoid another big no-value write down in the future.
- If we start discussing all of the issues and questions in this memo followed up by experiments using newly developed infotech tools and marketing methods, couldnít we develop breakthrough operational capabilities? How, for example, can we improve on the crude, first approximation ranking reports that I designed for inventory-item, sales-activity rankings included in this memo? (This report was a big project in í76; a snap today!)
- Does the grass and cash look greener in both new products and acquisitions for our chain, because we canít understand the success details that we canít see? What new details should we be looking at in our present business to do better which we might then re-apply in our next acquisition?
- I will look forward to discussing this memo the next time I visit your location.
As I subsequently cycled through our divisions, here were the general reactions to my memo:
- Most had "read it" but couldnít remember any of the details.
- They had no real ideas or plans for any of the topics I raised. They were all too busy perpetuating the past.
- As we went through the memo in a step-by-step way, they had conventional, industry-wisdom reasons for why we had to continue to be "full line" distributors for all of our suppliers and add new items generously. The few winners were more than paying for most of the losers we had, werenít they? And, they were already selling all of the old items to old customers, because they were thorough professionals.
An important contextual detail was that all of them had more incentive pay tied to generating margin dollars from their assigned accounts than they had in growing operating profit faster than inventory and receivable investments. (All of our operations managers had key account responsibility and incentives in those days; the buyers were on salary and very defensive about the new "cash traps" in inventory metrics.)
But, there were about 3 managers out of 20 who had both read and thought about the old to old opportunity. So, with their energy and curiosity, we started to "push the wheel of learning", improve inventory performance reports, pioneer new, total-team, account cracking solutions for both best old and target accounts, etc. As we "failed forward" towards achieving new levels of operational excellence, I reported the progress along with new monthly division metrics to the rest of the management team.
Other enabling changes were made that helped to reshape management perceptions and actions:
- Management incentive plans were re-weighted at year-end to favor improving pre-tax return on controllable assets.
- All new stocked items were coded and tracked and were also assigned a "product manager". If a new product couldnít find a "product manager" volunteer, then it wasnít put in stock.
- Old and new non-moving inventory was written down and eventually disposed of on a much faster, systematic basis that regularly effected year-end bonuses. (New product investment rates plunged compared to previous years.)
- New inventory performance numbers were generated so that all locations could be compared on a monthly basis. The numbers included: percent of inventory dollars tied up in: a) excess stock, b) dead and c) new for stock in the last 12 months trailing. This sparked a wave of first remedial improvement programs and then preventative programs to reduce all three categories by over 30% of average inventory investment while fill-rates actually improved.
Exhibit 28, page 3
Merrifield Consulting Group, Inc., Exhibit 28