HIGHLIGHTS FROM PAST DOWNTURN
As you skim through the excerpts from four of my
publications since 1990, be aware of not only the “how-to” ideas, but the
assumptions behind my thinking and rephrase those as your own questions using
some format like: “Do I really believe that ‘x’ is working or will happen,
because of assumptions ‘y’ and ‘z’?” Write down all of your operating
conclusions, the underlying assumptions and the related questions that they
will in turn raise. Then, live into the questions for awhile; don’t rush to
judgment and risk reaching the same old habitual, reflexive conclusions.
The current US downturn (7-1-08) will, IMHO, be
like no other that we have had in our lifetime. It will take hard, fresh thinking
and action steps to get through this one better than the average competitor. Think
about your questions for awhile. Live into them. For more on “questionating to
innovate” see exhibit 40 http://www.merrifield.com/exhibits/Ex40.pdf
and article 1.20 http://www.merrifield.com/articles/1_20.asp
Distribution Channel Commentary #103(Jan.’08)
TACTICS; NEXT-LEVEL TUNING; OR, TRANSFORMATION?”
How’s the economy hitting your business right now?
you may have already dusted off the curriculum for “Downturn Tactics 101.”
That’s where you implement across the board spending-freezes or cuts. Close or
consolidate a few losing branches or sales territories. And, postpone any
discretionary spending or proactive investing until the downturn blows by.
if our channel downturn is like housing, too deep and prolonged with too much
industry capacity throughout the supply chain? Or, we want to work smarter, not
harder than the Downturn 101 crowd and make more money? Shouldn’t we step up to
the curriculum for: “Downsize, Upgrade, Refocus and Renew 201?” Or, we
could subscribe to the design department’s cognate: “Simply and Amplify 202.”
level of thinking, clever managers don’t just rank by (net present)
profitability value the key elements of the business: people, customers (by
profitability contribution, not margin dollars) and suppliers. They weed the
bottom ones to free up resource energy and payroll dollars to refocus on all of
the winning elements that (who) have proven breakthrough or breakout potential
(roughly the top 2 to 10%). And, then finally apply a total team, innovation
obsession on those few winning elements.
tight, intense focus on a small percent of the people, customers and suppliers?
Here are some assumptions which you are free to challenge with your own counter
10% of the employees in a selling/service
organization will make 80% + of the new things happen (the other 90% can then
work hard to importantly maintain the new streams of profits).
Less than 5% of the potential customer base will
generate 80% of the new profit growth in the next five years for some supplier
(why not us?).
Less than 3% of all mature businesses are perpetual
innovators. Who are those cats amongst the supplier pool? Work with them to
co-create the next supply chain value proposition for the best target
customers. But, you must have a track record of being an innovator or at least
willing to allocate strategic, co-investment resources upfront with a win-win,
share the costs and the gains attitude.
managers must be “Trim-Tab” oriented to effectively hyper-focus on the right,
5 core accounts per customer niche to
systematically sell more to the core;
5 target accounts to crack and partner the high
growth gazelles; and the
5 biggest loser accounts to turn 80% of this lead
trim-tab? It’s a small rudder on a rudder of either a ship or a plane. If the
captain of a huge tanker moves the trim tab with little effort, the trim tab
then builds a low pressure that pulls the rudder around which allows the craft
to be controlled. To be a trim-tab manager we have to always be asking
ourselves: how can I achieve the most profit growth for the least amount of
effort in a way that moves us towards our best strategic vision? In a world of
commodity products with customer bases in which 95% are not big or innovative,
it comes down to “triple nickel (5-5-5) marketing.
on “triple nickel marketing” check out our exhibit at the link below or call us
for an audit on how to zero in on these accounts and what strategies to pursue
for them: http://www.merrifield.com/exhibits/Ex44555kit.pdf.
All of this trim-tab stuff is in our “High Performance Distribution Ideas for
All” DVD-training program (more in the center of our homepage at http://www.merrifield.com).
aren’t happy with trim-tab profits which run 2-4 times what average profits are
for a given industry, then perhaps we should think about deconstructing our
current mix of business into two or more “strategic business units” (SBUs) to
find a “new growth business model” for which there are no other competitors.
Think of “Blue Ocean” (google it) paragons like:
Southwest Airlines that was the first and only
airline to work a city pair where the competition was drive yourself or take
Cirque Soleil that invented a circus-like
entertainment concept that didn’t have any animals.
Fastenal which pioneered two-step,
convenient/emergency buying distribution of fasteners to small towns (2000+ and
growing in North America). FAST has grown
earnings at a 30% compounded growth rate over the past 20 years without any
acquisitions or external capital raising while returning average returns on
capital well over 20%.
of thinking requires stepping up to “New Business Models 401” for which
outside assistance from people who have seen lots of different business models
in lots of different (distribution channel) industries would be a help. The
transformational future for most businesses already exists in pieces and parts
that are in other places. How do you, for example, take:
A Software-as-a-Service ERP solution
Add to it built in VMI, barcoding and e-commerce
Apply the replenishment economics and partnering of
the drug wholesalers to the retail pharmacists
Mix in the local entrepreneurial energy of a
Apply the “whole-tail” pricing of WWG, FAST and MSM
II. From an article entitled: “Different Tactics for a Different
Type of Downturn” (2001) which focuses on the measurable, financial “upgrade”
improvement room that 90% of distributors have.
Yes! Here are some reality-check statistics
followed by some tough questions for the 90 percent of all distributors that
aren’t in the top 10-percentile, financial performer category.
IDA's "2000 Profit Report" indictment:
before the current recession hit, the median IDA distributor had gross margins
of 24.8 percent, a profit before tax margin of 1.6 percent and a pre-tax return
on net worth of 10.6 percent. The top 10-percentile companies, 14 out of 142
firms reporting, had the following average statistics: 32 percent gross
margins, 7.7 percent PBT and 61.5 percent pre-tax return on net worth (6X THE
MEDIAN!). The median distributor had $8 million in sales, the top 10 percent
had $11 million, a sales volume difference that cannot account for five to six
times better profitability rates!
What could the top 10 percent be doing differently?
They are obviously “selling higher” with a 32
percent 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 percent haven’t. 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.
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 Crosby’s
“Quality is Free” book from 1979? He estimated that the average service firm
spent 40 percent of the total payroll cost on “non-compliance” activities, a
euphemism for mistakes. The top 10 percent have probably figured out how to
achieve do-it-right-the-first-time economics.
The top 10 percent can’t be selling big,
money-losing contracts at low margins to have a 32 percent average gross
margin. Why haven’t the bottom 90 percent 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 percent of the competitors who don’t 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.
A company can’t achieve, sell and get paid for
distinctive service excellence if all the employees don’t have their hearts,
minds and wallets wired into the high performance cause.
III. From article # 1.9: “Tough Times are Just Beginning” (2002)
WHICH PATH TO TAKE?
play safe and die slowly in the long run, because we aren’t fundamentally
changing in tune with the market place, but rather just cutting back the oats
on the same old plow horse and process? Or, should we play to win and reframe
our actions to not only survive the downturn, but shift to a high performance
have already chosen the first path by battening down the hatches to ride out
the storm, in hopes of continuing business as usual with an upturn. The
sequential step drill is to:
cut all discretionary expenses
then cut wages across the board perhaps
progressively so, with high income players taking a bigger percent cut than the
lay off people in proportion to the decline in
sales with the weakest ones going first
then, hold on until better economic conditions
arrive in one to two quarters.
three main problems with these simple survival solutions:
Many managers never fully confess their sins of
expansion and diversion committed during the good times, so they don't shape up
or shut down some of their biggest losing, pet projects (and customers). We
need to be able to believe that "Volume is vanity, profit is sanity.” And,
we need to downsize all losing elements of our business to refocus and
revitalize all of the top 5 to 10% of our remaining elements: employees,
customers, suppliers, locations. Less is more; build on strengths instead of
trying to turnaround weaknesses or chronic losers.
Cutting back oats for the corporate horse during a
downturn does not ask the big question; why was the company such a poor
performer before the slump? If the company was a resource trap before the
downturn, why starve it now to try to get back to minimal performance in the
next up cycle?
Will a hibernation strategy even get a
resource-trap company back to bare existence in the next upturn? More companies
fail after economic slumps are over than during them because they are so
financially weakened and demoralized from hibernation treatment. They can not
keep their best employees, customers and suppliers from leaving for better,
stronger, faster expanding competitors.
ADDED INSERT(7-1-08) The downturn
of 2008 is unlike any that we have had since 1929. A global credit bubble,
which in turn begat many other asset bubbles, including housing in the US, is
unwinding. Some industries tied into housing or domestic consumer spending are
looking at an unusually deep and prolonged downturn. Holding our breath for one
or two quarters isn’t going to suffice. The supply capacity for many industries
will have to be radically downsized and restructured.
THE TURNAROUND, RENEWAL OPTION?
don't like the implications of the three problems above, then there is an
alternative: the hit-bottom, sober-up and reinvent the company choice. We
can admit that we made past mistakes that we can no longer feed and
shape them up or out now! We can assume that our unspoken operating assumptions
were giving us poor results before the downturn. We need to articulate these
assumptions, then discuss them in contrast to proven, high performance
success assumptions and finally make choices and changes. Without admitting our
past mistakes or surfacing and challenging our flawed assumptions we can't be
open to considering and adopting new ones.
also admit that we can't make turnaround tactics or renewal programs work
unless all employees are part of the solutions. At low performing distributors,
the front-line employees are unaware, uneducated parts of the problem. How will
we educate all employees about many things affordably and continually?
the big confessions above is actually the easy part; successfully executing a
turnaround renewal effort is tough. The total effort typically
breaks into two inter-related parts, weeding and feeding. Companies need to
rank all of the vital elements of their business: niches of customers by
strategic importance, customers within niches by profitability, employees by
net productivity, branches by viability, and suppliers by importance for target
customer niches. We must then manage the extremes; shape up or move out
the bottom percentiles of each element group in order to refocus on and feed
the top 10% that are more than 50%+ of the historic and future strength of the
prioritizing of customer niches by strategic importance is critical to the
renewal plan. We can't just downsize and upgrade elements, we must also be
re-focusing and re-directing ourselves towards niches of customers in which we
can become a dominant #1 with 50% or more share of the “profit pool” by
distribution center region. Because both manufacturing marketing efforts and
distributors have been historically product and volume driven, it isn't easy to
conclude that selling everything to the best, growing customers within one
niche at a time is the best way for growing both faster and more profitably. But
IV. From Article 2.4: STRATEGIES FOR A DOWNTURNING
ECONOMY - OCTOBER 1990 (This one has some more how-to methods in it).
economy has been in a mild recession for all of 1990, and now it is starting to
slide deeper and faster. How deep and long will it go is a guess. Given how
much personal, corporate, and government debt that is outstanding, it would be
wise to have contingency plans for mild, stiff, and heavy scenarios.
firms can survive in good times, but tough times often dramatically separate
the well-managed, positioned and opportunistic firms from the weak. In
downturns, strong firms can actually grow sales, profits and market share by
filling the vacuums left by the radically retrenching weak firms; consider how
Delta Airlines has been feasting on Eastern. The weak do not technically get in
trouble in bad times, they plant the seeds for disaster in the good times by:
overextending themselves while going for unfocused volume financed by debt
instead of retained earnings; or by harvesting the business instead of
reinvesting to create sound and strategically dominant firms.
watching strong firms feeding on weak ones in the current downturn some
strategic guidelines follow for which there is still time to preventatively
practice to some degree.
The average firm should sketch out scenarios for
a drop in volume and margins over the next 12-18 months for three levels - for
example, 5, 10, and 15%. Because distribution firms have a lot of variable
costs and assets, it is theoretically possible to downsize cost structure and
asset investment in proportion to margin decline. From a timing viewpoint,
too many firms wait for the downturn and then reactively slash expenses and
investment across the board. It is better to anticipate declines and downsize
concurrently and strategically. Don't cut across the board, but prune the
losing locations, product lines, customer segments, and people to feed and
maintain the 20% that generate 120% or more of the value. Best firms weed their
gardens continually, but many need a downturn to stop wishful thinking and
Remember to maximize cashflow and ignore
accounting "profits." To preserve working capital to pay bills
and pay down debt we need cash. If firms do close poor branches; write-off the
50% of receivables past 90 days that won't be collected; ship back or write-off
the inventory that hasn't been requested in the last year; etc.; these measures
may generate huge accounting losses, but they all either generate cash in hand
or allow a firm to get a check from the government on a tax-loss, carry-back
basis. Don't report fictitious profits and pay taxes which is cash flowing out
of the company.
Many managers may resist doing steps one and two
because they don't want to admit past sins so visibly, but the stated excuse
for delaying and tempering cuts is "we don't want to spook employees
and bankers." In life the sooner we face the pain, the less it will be;
delaying action will just make the cost and trauma greater. It is best to
confess our sins, state our economic forecast and plan in a way that we can
confidently see light at the end of the tunnel. Most bankers and employees will
be relieved and delighted to assist in the plan. They know the news on the
economy; they feel the daily pulse of slowing business; they see or sense the
deadwood, the fat, the underwater projects around the firm; and they wonder why
management doesn't do what it should.
If anticipatory, strategic pruning is necessary, it
is best to have an articulated forecast, budget, and action plan, and then do
all the cuts quickly. Like removing the Band-Aid, a quick, big tug hurts less
than the cumulative anguish and pain of a series of tiny tugs.
For asset management, inventory investment often
swells in spite of best intentions for several reasons.
In a declining economy, lead times from
manufacturers often drop more quickly than inventory computer models can detect
them on their own. Inventory will flow into the warehouse sooner unless the
problem is anticipated and reorder point calculations are manually changed.
Demand from different customer segments will often
drop more quickly than inventory software can detect it. The replenishment
reports instruct buyers to buy more, based on historical demand. Again, the
software must be manually overridden to lower reorder quantities and cumulative
inventory investment budgets.
Suppliers are quick to offer deals which include
discounts and dating; these deals don't seem to threaten cashflow
until it becomes apparent that an extra two months of supply is six months
because demand is down. And the special price isn't a deal if all competitors
loaded up on the same deal and are passing the savings on to the market. Nibble
at these offerings and match competitions' prices to your core customers.
Days outstanding for receivables will lengthen
during downturns, but this general statistic masks several sub-plots.
Well managed firms are good for the cash and most
will continue to discount. If a few of them are tempted to stretch suppliers,
an on-going, disciplined collection system will nudge them back into prompt
Loose, harvested, or overextended firms will be
squeezed and will try to pass the pressure on to their suppliers. For this
group, a firm must make a select number of judgment calls. List the customers
that have been: historically profitable; a good strategic fit with what you are
selling; and somewhat to significantly faithful. Remove from the list any
customers that you have doubts about their ability to survive the downturn. And
then budget how much financing you are willing to extend and on what terms. By
proactively offering some leeway and advice on how to work out of their
situation, if appropriate, negatives can be turned into long-term positives.
But, don't finance all of this category when they are discovered to be past 60
A third group of customers will have already been
slow-paying and a downturn may put them into serious trouble. If these accounts
have weak and untruthful management and are not number one or a strong number
two within a focused and viable niche in their market, cut losses now to avoid
bigger losses and run-arounds later.
Can firms sell or market their way though
downturns? It depends. There are several strategies that can work:
A strong, focused firm can target weak head-to-head
competitors that are imploding from past sins as in the Delta Airline example
Alternative channels of distribution with less
service and lower prices can strip away business from the full-service,
higher-priced competitors who can't figure how to unbundle and sell services on
a cost-plus basis. For example, small businesses have been switching from local
office supply dealers to mail-order houses like Quill or category killer
Some customers can be persuaded to trade-down from
high- priced, high-quality goods and services to minimum requirement goods and
Promoting lower inventory investment solutions can
gain volume, because customers will be looking for cash flow savings. The
supplier may have to cut the price creatively by stocking more and delivering
smaller quantities more often; if it makes strategic sense, do it.
Selling harder with me-too products,
undifferentiated service, and sharper prices or terms backfires. Customers
cannot buy more if their demand for product is shrinking. They cannot take care
of whining existing suppliers let alone another. If sharper price offerings
make them think, they usually give the entrenched supplier last look. If the
competitor passes, the aggressor captures new volume with margins that will not
cover the cost of taking care of the customer. Volume increases but profits
drop, and inventory and receivables grow. Financing empty volume with debt is a
disastrous long-term formula.
The best way to grow in good or bad times is to
retain the profitable accounts at a greater rate than the competition by not
making service mistakes or dropping service levels significantly because of a
credit crunch. Remember also that "grow" should apply to profits and
return on investment which today is often very independent from growing sales
volume. If given last look at a piece of business which will become
unprofitable, pass to reinvest resources in other potential profitable business
or downsize to better focus on what profitably remains.
would like a generous economy, but tough times favor the best-run and
strategically opportunistic firms who proactively anticipate economic events.
Use these guidelines to turn a negative economic scenario into a positive one
or dramatically reduce the losses that could occur.
© Merrifield Consulting Group, Inc., Exhibit 55