High-tech adoption needs high-touch distribution

Analog circuit technology, once considered mature if not commoditized, is experiencing a renaissance in growth due to its essential role in a wide range of new devices. According to GBI Research, the analog circuit industry can look forward to attractive expansion through 2020 as new OE product platforms proliferate around smartphones, tablets, radio base stations, portable device batteries, medical imaging scanners, electric cars, and a wide variety of other industrial and medical applications. But my discussions with decision-makers and technical users at a range of OE end-users in North America suggest that analog circuit manufacturers face significant barriers to getting their newest innovations adopted in the fast-growing small- and mid-sized horizontal OE market: §         After years of digital technology adoption, today’s product development engineers at small- to mid-sized OEMs lack a deep understanding of analog technology and its latest developments. §        Lack of analog expertise means that most OE product and purchasing engineers will default to familiar legacy brands and trial-and-error component selection and procurement. The supply chain process is seen as cumbersome, risky, time consuming and inadequate. §        Rapid consolidation of semiconductor distribution means that the bulk of today’s analog products are distributed through a small number of global players offering extensive assortments, ease of order entry, and competitive prices. Promotional materials by these players aside, the reality on the street is that the field application engineering support craved by small- and mid-sized OEMs is wholly inadequate. §        The pinched economics of small- to mid-sized OEMs requires a multi-year lifecycle approach to customer development and demand creation investment that large global distributors and traditional manufacturer reps find hard to square with financial pressures. Streamlined websites and proliferating online data sheets or webinars are great but not the high-touch assistance smaller OEMs require. The bottom line for analog circuit manufacturers investing heavily in technology innovation and product differentiation for industrial and medical OEMs is this: incremental growth will come from building new demand creation capacity and competence in their distribution channels. In next week's blog post I will detail steps that forward-looking manufacturers can take to make their distribution channels their engines of growth.

Big D distribution

Surviving the distribution revolution won't be easy, and is not for the fait of heart - espefcially in the current global economic environment.

But there's way to not only stay out of the line of fire - but thrive. It's through big D-style distribution. And you achieve it by building differentiation, diversification, and discipline into your routes-to-market strategy.

A few words about each.

Differentiation. Start with a straightforward strategic exercise: figure out experience gaps most important to customers, evaluate the current distribution system’s capabilities to create the desired outcome, and proactively negotiate “who does what” to close critical performance gaps.

• Market leaders take an end-customer view of distribution and from it create precise refinements in how their channel systems meet the distribution needs of end customers. Their ultimate goal is ensuring that end-customers’ distribution experiences with their own products are demonstrably better than with competing products.

Diversification. Market leaders know deep down that there is peril in viewing distribution needs as homogenous. They work diligently to see the trees for the forest. They ensure that unique channel solutions are crafted individually for every potentially profitable segment of customers. Diversification is just as essential in distribution as it is in other portfolios. One-size-fits-all never works everywhere or always.

• Thus, attractive as low-cost channels can be, both Dell and Wal-Mart have seen their growth stall as they reach the saturation point of efficiency-minded customer segments. Both are now struggling to branch out. If they are successful, it will be by structuring direct sales, the Internet, and channel relationships into a portfolio of activities designed for unique customer distribution experiences.

Discipline. There is a critical distinction to be made between unhealthy channel conflict and healthy channel competition. Conflict tends to be marked by price wars between distribution channels that lack differentiation from each other. Healthy competition, on the other hand, flourishes when different channels create distinct sets of distribution experiences to attract different segments of end customers.

• Minimizing conflict and invigorating competition requires discipline in channel portfolio design and management. Above all, it requires making sure that channel mix, intensity, and management decisions are true to customers’ experience demands and shared manufacturer-distributor beliefs about how customers segment.

* * * *

Manufacturers and distributors can do a much better job of acting in concert with each other, assigning and coordinating downstream programs and activities to create powerful new total customer experiences.

By focusing together on experience innovations, they will give end customers higher, more desirable value and drive market share and profitability gains.

Competitiveness and Intellectual Accounts

A recent Op/Ed piece argues that our competitiveness as a nation in coming decades will be determined not only by our financial accounts but also by our intellectual accounts. That same prediction is being made about a less lofty realm as well - at the level of global go-to-market and supply systems.

Power bases are shifting - to expertise, which will always trump its weaker cousins coercion and even reward. Expertise about opportunities to create incremental new value for all the players in these complex supply and distribution systems. From strategic conversations that provide insights directly - in the voice of the end customer.

When marketing channels are championed, or stewarded as Professor Kash Rangan describes, from an external perspective, an end customer perspective, surprising things happen. Customers see new value, and improved buying and decision alternatives. Intermediaries are winners, focused on creating tangible growth-oriented advisory and physical distribution value for both their customers and their vendors. And branded product and solution manufacturers operate on a strategic path of differentiation.

Differentiation in not only product dimensions, but total customer experience. The kind of customer experiences that build excitement and new options for end customers. The kind that grow a marketplace and increase the margin pool. The kind that optimally-structured marketing channel systems provide. Finally. Welcome to the 21st Century.

* * * *

Disclosure - But then I think this could finally be the Cubs' year. The team not only has talent and seasoning, the team has chemistry. And they think. Can they build momentum - from a .500 start?

Western Competencies Surge as Supply Chains Falter

“China has been the world’s factory and the anchor of the global disconnect between rising material prices and lower consumer prices,” said Dong Tao, an economist for Credit Suisse, to the New York Times. “But its heyday is over. We’re going to see higher prices.”

This has to be welcome news for American manufacturers. Maybe offshore price competition will ease a little in the short run. The $64,000 question is what’s the best way for Western branded manufacturers to respond? Most manufacturing executives would redouble their R&D efforts. That’s just going to intensify competition.

My vote is for more attention to distribution.

American businesses know U.S. business systems intimately. They have an advantage in cultural as well as linguistic fluency. They have long and deep relationships with wholesalers and retailers. We’re not talking competition on Internet time here. Well into the future, Pacific-based corporations – even those with U.S. subsidiaries – will be disadvantaged in the nuts and bolts of overseeing how their products are marketed by trade partners.

What’s more, end customers are showing resistance to the low-price pitch when it’s attached to bland, shoddy or possibly unsafe products. Now is the time for mature Western manufacturing enterprises to step it up, and differentiate in a space where their ultra-low price rivals simply cannot: on-time deliveries, in-store training, more flexible returns procedures, and above all by putting superior knowledge of the end customer to work in the retail sales environment.

Customers will respond positively.

What is more, U.S. legal precedent now allows the possibility for manufacturers to set prices for their goods at the retail point of sale (see prior 360 Degree View post: Signs of a New Distribution Era Emerging). In other words, a branded manufacturer can work on distribution differentiation selectively with a few quality retailers, every party assured that a store down the street will not undercut them.

Supply Chain Momentum Faltering?

These days it seems the easy phase of restructuring operations for global competitiveness is moving production offshore to low labor cost regions such as east asia. The hard part is getting the products to end-users reliably. The challenge goes beyond shipping costs - although problems in supply chains can certainly play havoc on cost structures. CEOs are finding that strategic and highly skilled supply chain managers are worth their weight in gold in today's global marketplace

. . . the surge in global trade in recent years has added to strains and charges for all forms of transport. As a result, some manufacturers are developing costly buffer stocks [to] avoid shutting down production lines, [shifting] to more expensive but more reliable modes of transport, [and] some companies are turning to new information technology to keep supply chains flowing. . . (Manufacturers Cope With Costs of Strained Global Supply Lines, WSJ).

There was a time in the early 1980s when distribution strategy was considered an oxymoron by most executives. Relegated to the bottom of most management team discussions, distribution and marketing channel strategy discussions back then were primarily concerned with shipping and warehouse management issues - hardly worthy of too much senior executive time.

Times have certainly changed, and there isn't a CEO around who isn't looking for a supply chain leader who can craft strategy, manage detailed tactics, structure winning partnerships, and create complex back-up plans and error recovery systems.

Let's hope these new supply chain leaders rise to the occasion. Articles like the one referenced above raise a red flag: buffer stocks and last minute high cost air transport feel like a step back in time!

McKesson to Focus on Sourcing as Advantage

Just like their retail cousins, large business market distributors are moving to lock in power and marketplace negotiating advantage from their sourcing systems. Pharmaceutical distributors, such as McKesson Cardinal Health, and Amerisource-Bergen, are evaluating opportunities to change out their largest generic drug makers in favor of smaller contract manufacturers. The hope is that increased margins follow increased market power.

Exim-Pharm, an India-based provider of bulk pharmaceutical drugs and formulations, is one company hoping to benefit from the move to more aggressive drug sourcing by leading distributors. In fact, India is a popular destination for aggressive buyers seeking out and evaluating new low-cost generic drug supply opportunities.

Not surprisingly, internet-based portals and services such as "trade2gain.com" have emerged to help eager drug buyers link up with hungry players in the fragmented overseas drug manufacturing sector. Yet the parallel activity in the retailing sector offers the B2B marketplace and its distribution powerhouses some important lessons.

In fact, the largest U.S. retailers are in the midst of a major re-evaluation of what many are now calling an era of "rushing to the bottom" in prices and service levels. After years of obsessive strategic focus on private label and house brand sourcing from overseas contract manufacturers, these retail distribution powerhouses are increasingly calling it quites and returning to their critical roots as 'merchants'. Why? Because end-customers have become numbed into price-only shopping behavior. Not because that's all they care about (look at Apple's astounding retail store profitability!) but because that's all they're being presented with in most U.S. retail systems. And commoditization is an unattractive growth path for anyone involved, be it manufacturers or retailers. It's a treadmill with no upside.

So McKesson - and other B2B distributors - would be smart to balance their short-term drive for sourcing advantages against increased differentiation in service levels. But finding ways to create real 'distribution value' for pharmaceutical customers requires collaboration and more strategic manufacturing relationships. Commmoditization only requires an internet portal.

Industrial Distributors Tracking Consumer Channels' Move to Private Label

Key findings from Industrial Distribution magazine’s 61st Annual Survey of Distributor Operations suggest that channel players in industrial B2B markets are following their consumer market brethren a dangerous move away from trusted brands and greater use of private label products. Key findings form the August, 2007 research:

• Internet sales to end-users not significant
  1- 10% of revenue for over half of distributors
  70% order products from suppliers on the Web

• Distributors ramping up value-added services - 64% do not charge for them
  Engineering capabilities
  Plant audits
  Special lead times
  Set up and installation
  Employee training
  Technical product support
  Integrated supply

• 79% sourcing overseas - over 35% ramping up private-label
  Top-50 Interline Brands, a major MRO products distributor of plumbing, electrical, hardware, security hardware, and HVAC parts says that over 20% of their sales come from private-label product

• Major reason for winning business from customers
  36%: product availability
  20%: technical support
  9%: customer service/relationship or delivery time
  5%: price

But even with all the emphasis on value-added services (albeit without charging for them), distributors say their top rated strategic concern is: price competition (43 percent)

Industrial Products Leader Focuses Distribution on Tangible Value

French aerospace electronics and systems group, Thales, is making a bold strategic statement about its approach to aftermarket parts and services business. The company has taken steps to localize parts distribution support and has employed Web-based technology to boost service levels.

In a trend we're seeing in more and more industrial markets, Thales has moved its aerospace support and distribution activity closer to its end customers. The moves resulted from abroad strategic review which found that fewer and fewer airlines were choosing to repair avionics systems because the total costs of stocking spares combined with test equipment, training and documentation is uneconomic unless the service provider achieved scale and logistics advantages.

Favorable to the OEM, the company also learned that most airlines preferred to subcontract their electronics maintenance to OEMs. This enabled Thales to develop offerings ranging from turnkey services, which include line maintenance at an airline's stations, to new logistics support for spares, repairs and replacements to individual spares or services.

Here's an example of the innovative distribution services that Thales has structured to create tangible value for its customers and partners:

• Repair, distribution, logistics support and "Integrated Supply Services", ranging from repair contracts based on flat-rate, cost-per-hour use to more comprehensive avionics-by-the-hour (ABTH), which includes replacement, repair, overhaul and guaranteed spares availability plus a line maintenance service.


• Repair parts stock has been moved to in-country facilities to support smaller airlines


• Repair operations have been moved to new regional repair facilities


• Set up a centralized center to provide specialist support for every fleet equipped with Thales products


• IT tools are being developed that can integrate with airline operations systems to track each aircraft's location or next destination on an hour-by-hour basis -- thereby providing the center with complete visibility of any IFE problem wherever it occurs.


• For fragmented product markets, such as helicopters, Thales is setting up network solutions with partner OEMs using Web portals.


• Developed an online data interchange to help airlines with their engineering and technical activities: for example, downloadable component maintenance manuals. Ultimately, creating a centralized portal for all services


• Joined together an OEM Services consortium with Diehl Aerospace, Liebherr Aerospace and Zodiac to provide component support on a cost-per-hour basis for a group of parts on major aircraft platforms with large global fleets

Creating tangible value through sophisticated, customer-driven distribution is an astute direction for Thales and one we expect to see players in other tough, global markets employing. An excellent go-to-market case study!

MRO Distribution and the Need for Improved Plant Maintenance

The opportunity for industrial distributors to add greater and greater tangible economic value to struggling manufacturers is greater now than it ever has been. That's good news for product manufacturers looking for differentiation opportunities, and points to their distributors as a growth engine that has been under-leveraged for too long.

But to do so, the manufacturers and their distribution partners must get beyond the already commoditized basics: speed, reliability, quality and availability. If that's the only focus a manufacturer-distributor team brings to a potential customer the sales process will quickly and deservedly sink to a price conversation.

So the opportunity is to provide tangible value elements that create real economic improvement opportunities for plant managers. That will inevitable mean system solutions, integrated offerings, Tier I responsiblity, distributor consortiums, and outsourcing whole chunks of a plant's headaches. For a much more detailed discussion of how outsourcing plant maintenance could be better leveraged, read this excellent article by author Steven Welsh here.

Wesco Distribution has always been a shining example of an industrial distributor leading with value-added customer strategies. The company is a leading distributor of electrical construction products and electrical and industrial maintenance, repair and operating (MRO) supplies, and is the nation's largest provider of integrated supply services. Headquartered in Pittsburgh, Pennsylvania, the company maintains relationships with over 24,000 suppliers, and serves more than 100,000 customers worldwide. Learn more about Wesco's customer programs here.

Distribution Cynicism Reaches New Low: Authors Proclaim "Win Win is Dead"

The newly released book by Mike Marks, Tim Horan and Mike Emerson of Indian River Consulting Group, Working at Cross-Purposes: How Distributors and Manufacturers Can Manage Conflict Successfully, has the premise that "win-win" is dead or never existed between suppliers and distributors.

Here's what author Tim Horan had to say about the ideas in the book:

"The truth is that win-win can often cause more harm than good.
When executives believe that win-win exists and there is a shared prosperity, they start believing in entitlements. Entitlements don’t exist in today’s business; just ask the competitors of Wal-Mart who watched their long-standing suppliers cut prices and bend over backward for the giant retailer. We realized we were onto something with our “win-win is dead” thesis when we presented our findings to a round table gathering of major manufacturers. One of the participants, upon hearing our thoughts, exclaimed, “Boy am I glad to hear that, I always thought it was a bunch of bull. Finally, someone had the guts to say it out loud.” (source: http://www.ircg.com/Articles/Strategy-Development/Working-at-Cross%11Purposes.html)

Ouch! It's just that type of cynicism that hamstrings efforts to improve working relationships in industrial markets. Click on the link below to go to an excellent discussion board to hear these ideas debated by real managers in real situations in the field...

Click Here for Encouraging Insights from Industry Managers

Dealing with the Intricasies of Distribution

The economics of channels can be cruel, avenging angel. Shifts in customer needs and expectations, buying patterns, technologies and economic conditions can rapidly redefine the factors for success. The personal computer industry provides a poignant example of just how quickly, and radically, such economics can change.

Over the last few decades, the proliferation of personal computers throughout businesses, educational institutions and the home has been a rising tide that attracted and carried many distributors. In the early years of PCs, manufacturers came to market with direct-sale organizations. But because of heated competition and dramatic declines in prices, PC makers quickly sought alternate distribution channels. Distributors such as DaisyTek, Merisel and MicroAge, and retailers like CompUSA and Micro Warehouse took off, offering buyers a range of choices and cost advantages. However, just four years later, nearly half the PC distributors were gone, and the carnage wasn’t over.

It is such reasons that one is unlikely ever to hear a distributor say it is a “simple” business. Channels are fundamentally economic entities. They exist to divide labor, add value and share economic rewards via the margins each party in the channel enjoys. When channels form, each level performs certain activities they can do efficiently and which add value. Typically, the margins enjoyed reflect the value added for say, taking title (risk), maintaining inventory, providing outbound sales, or offering toll-free information and service. Over time, the value of these activities may increase or decrease, as well as the ability or willingness of channel partners to execute them efficiently and effectively. If the existing channel fails to fix its economics, a new or reconfigured channel will emerge.

Many other industries are suffering from similar distribution convulsions. The office stationary channel faced an onslaught from large retailers like Staples/Office Depot, Office Max and Quill. Ophthalmologists have been sideswiped by direct mail sources of contact lenses, and neighborhood bookstores have been running fast to keep with superstores like Borders or Barnes & Noble and “virtual” bookstores like Amazon.com.

These channel revolutionaries are not all in the consumer product arena nor are they always outsiders. W.W. Grainger, an industrial and commercial equipment and supplies distributor is a strong example of a traditional company that kept up with channel changes. In business since 1927, Grainger offers its million-plus customers some 67,000 products, ranging from abrasives and air compressors to ventilation and welding equipment. It has never stood still. The company’s passion for efficiency and value added service is legendary. Grainger maintains more than $700 million in inventory at 350 branches around the U.S. and regional distribution centers.

Because of Grainger’s assortment, depth and proximity, customers are able to reduce their own MRO (maintenance, repair and operations) inventory by up to 60 percent. The company has an advanced on-line ordering system for customers. In 1996, Grainger put its 3,588-page catalog on the World Wide Web. It also offers consulting services to reengineer customers’ MRO materials management processes. This sleek and creative distributor generates a return on equity double its nearest competitors and four points above the average for all U.S. distributors. Clearly, Grainger’s management understands the economics of distribution.

The intricacies of distribution are not limited to economics, however. Power is a fundamental element of distribution and is ultimately rooted in the ability to deliver superior value to end users. Product quality should be thought of as the ante to enter the game: Great distribution cannot save a lousy product. But those who exercise power in channels can control the fate of specific products and services.

One of the most dramatic ways of gaining power is to rationalize a fragmented and inefficient distribution system. American Hospital Supply did that for hospitals years ago- about the same time Grainger began building its distribution network. What McDonald’s did for hamburgers and Blockbuster did for videos, Auto Nation and CarMax have done for the used car market.

The keys are often building the proper assortment (one-step shopping for hospitals), standardization (try ordering half a Big Mac), cleanliness (not just the absence of dust and litter), location convenience, courteous and quick service. In short, the design of these channels is based on insights about customer preferences, and they employ systems designed to deliver on those insights consistently. Mom and pop operators and third-tier national chains have a tough time competing.

Distribution Miscues outlive Rubbermaid Management Team

Today’s go-to-market challenges reside not only in the design and creation of new channels, but in channel management as well. Even some of the best companies- Rubbermaid, Motorola and Quaker Oats, for example - have been tripped up by channel management miscues. Take Rubbermaid. In 1994, driving to continue its annual 15 percent growth in sales and profits, the Wooster, Ohio, maker of plastic houseware passed on a doubling of resin prices, its most widely used raw material. Retailers, unprepared for the price increase, balked; Wal-Mart, for one, which accounted for 15 percent of Rubbermaid’s business, shifted to other suppliers. Rubbermaid hadn’t given sufficient weight to the reality that massive retailers and every-day low pricing strategies now rule the roost-not its brand name or penchant for innovation.

The always prescient Peter Drucker said at the beginning of this decade that among the challenges facing management, “… the greatest will be in distribution channels, not in new methods of production or consumption.” Clearly, distribution is no longer the muddy backwater of business. The process of getting services and products to customers, once deemed to be unworthy of senior executive time, is now at the heart of some of the most innovative and disruptive strategies of this era.

The design and management of distribution channels is increasingly critical across all sectors. It is a high-stakes game where winning can bring huge riches and mistakes can be extremely costly. Witness the titanic struggle for supremacy in the self-service investment market between Fidelity Investment of Boston and Charles Schwab of San Francisco. Although Schwab’s initial claim to fame was as a discount stockbroker, it took a serious run at Fidelity’s market-leading mutual fund position by creating OneSource in 1992. OneSource revolutionized fund trading by offering 580 no-load funds from a variety of fund companies without charging customers transaction fees. As such, Schwab positioned itself as a master distributor and changed fund companies’ share of the assets (from 25 percent to 35 percent) sold through OneSource.

As a distributor offering broad assortment, efficient transactions and low cost, OneSource accumulated $33 billion in assets in just four years. While both Fidelity and Schawb continue to create new financial services products, their greatest competitive intensity is in creating newchannels of distribution via securities firms, insurance agents and banks. As Fidelity CEO Edward Johnson has said, “It’s like the difference between making movies and distributing them. It’s better to be in the distribution business, given that you have access to everybody else’s pictures.”

The stock price of Quaker Oats after its $1.7 billion purchase of Snapple Beverage Co. in late 1994 declined 10 percent in a period in which the Standard & Poor’s 500 stock index rose 41 percent. Most analysts agree that the cereal company paid too much for Snapple. However, the enduring performance problems are rooted in Quaker’s inexperience with Snapple’s system of independent distributors. Arrogance, mixed signals and other miscalculations badly damaged Quaker’s relations with distributors.

Watching well-respected brand names botch their market opportunities along the paths to their customers leaves us shaking our heads. But what’s more disturbing is that the cost of such channel mismanagement is growing significantly. Over the next 10 years, two trends will turn what used to be minor distribution miscues for many companies into significant, and possibly fatal, blunders: ever-increasing consolidation of channel participants and sweeping technological change. The former will put even greater clout in fewer hands. The latter will result in even more efficient channel systems, as well as direct selling and distribution to consumers for a growing number of product categories

The marketplace is changing so rapidly that the management of distribution channels now requires ongoing monitoring of the needs of customers and channel partners, as well as new technologies for answering those needs. There are four ways for managers to ensure their distribution channels become a conduit and not a constraint to growth: 1) design and manage channels based on understanding the buying needs of end customers – and not allowing channel partners to control one’s destiny via greater knowledge of end users; 2) master the intricacies of distribution; 3) view the Internet realistically and yet creatively in planning new channels; and 4) prepare for the inevitable channel conflict.

Break The Rules to Win in Food Service Distribution

Over the last ten years, sales in the American foodservice industry have roughly doubled. The same period has seen significant consolidation among upstream food processors and mid-stream wholesalers. As a result, the largest players have generated top-line revenues outpacing U.S. economic growth. Yet competition and commoditization are rampant. For most players, profitability dismal. What kind of moves will help aggressive incumbents break free from the pack – and from a legacy of conventional, uninspired industrywide strategies?

Our answer: Disrupt the industry’s traditional pattern of distribution to hit a powerful home run.

When it comes to distribution, most vendors concentrate on surface-level improvements, shying away from the deeper problems. That foundational weakness shackles them. Consequently, they aren’t set to take a full swing at what is arguably their biggest market opportunity: small and mid-sized food service enterprises. SMEs, as these operators are known for short, represent a huge segment of suppliers’ market. And it is a virtual greenfield of demand.
It’s true that SMEs are being serviced now. However, aside from some notable exceptions, these service levels remain distressingly low. Granted, SMEs are an operational nightmare to serve, hundreds of thousands of unconsolidated accounts tucked into every conceivable nook and cranny of America. Simply converging with other players gains a company little or no field advantage, and costs much in the process. A hard-dollar business rationale no longer justifies underservice. With competition overheating in the national-accounts space, vendors have to look elsewhere to relieve pressure on their margins. They have to deliver. They have to hit the optimal SME go-to-market model, exactly.

There is a right way to develop that new model. It starts with understanding – first, small operator customers, then go-to-market channels, and finally strategic alternatives – and then on this basis resolves tough SME market issues:

• How to set aside the large-account sales mindset


• How to scale and augment capabilities to reach thousands of small outlets


• How to differentiate within a sea of commoditizing distribution channels


• How to gain share in the rough-and-tumble small operator market


• What mix of go-to-market channels to use (What’s hot and what’s over?)


• Whether to invest massively and integrate into distribution activities


• How to ensure exciting customer experiences (How does online fit?)

Planned disruption to the go-to-market landscape can widen margins, drive up market share, and eliminate competition. The supplier or wholesaler willing to work with key distribution partners and present a unified—and dramatically improved—value delivery system to SMEs can make convert this ‘alternative market’ into a ‘core growth market.’

Q&A Bantor on Disruptive Distribution

Question: Isn’t it our channel partner’s job to add extra value to end-users and gain share for our products?

Answer: Relinquishing too much responsibility for your end customers’ total experience reduces opportunities to create proprietary differentiation and higher margins for your own products and services in the marketplace. It is always in your best interest to help shape the powerful new value propositions that will draw end customers and channel partners closer to your company. In a world of increasing distribution scale and consolidation, too much market power is being lost by passive incumbent suppliers.

Question: What’s more basic than getting channel partner relationships right and continuously improving supply chain performance?

Answer: It has become painfully clear that focusing on conventional performance levers creates little sustainable advantage. Incremental improvements are simply inadequate to hitting growth and profitability targets. Indeed, the usual improvements—broader line coverage, more competitive prices, rising allowances and rebates, increasing product quality, higher fill rates, faster delivery, electronic order entry, recipe promotion, chef training—are now simply ‘costs of entry.’ They have become requirements. Future winners are already taking steps to find more differentiated strategic levers for their future.

Question: Wouldn’t it be risky to open up to a key partner, even for the sake of greater channel system competitiveness?

Answer: Putting your nose to the internal grindstone then periodically lobbing new programs or price concessions over the wall to channel partners is ‘old school management.’ Powerhouse market leaders engage intensely in strategic collaboration, co-development, joint risk-taking, and tighter relationships up and down their value chains. In today’s networked world, ‘go it alone’ is what’s truly risky.

Question: How can we take on longer-term differentiation when everyone is stretched for time and resources?

Answer: There’s no doubt that competition today forces organizations to be lean and efficient. The trick for growth mavericks is to find strategic leverage through collaboration. Engaging with channel partners – really engaging in an open, strategic dialogue – creates more enthusiasm, higher impact strategies, and greater commitment. But best of all, collaboration creates a bigger pool of opportunities and resources. Are you and your channel partners paying enough attention to sustainable differentiation?

Small Restaurant Owner Designs New Food Service Distribution

Jay Porter, the bright, thoughtful owner of The Linkery - a small restauarant in San Diego - wrote the following to illustrate how a Food Service distributor might rethink their Small Business strategy:

Mon, 1 Jan 2007 16:50:59 -0500
To: Fellow YESCO Assocates
From: Jay Porter
Subject: Changes in 2007

Greetings everyone and a Happy New Year as well.

As many of you probably know, our Board of Directors has brought me on as CEO, beginning today, in order to help our company finally establish strength in the Small-to-Medium-Enterprise (aka SME) market.

While our company is the largest and most successful broadline distributor in the foodservice world, all of our business is concentrated in the world of enormous foodservice companies with predictable volume and needs. This puts us in the position of becoming basically a commodity provider — with the attendant trend toward low margins, dubious quality, and uninteresting jobs for all of us except our finance department.

By expanding into the SME market, we will grow out of the commodity market and into services that are difficult for our competitors to match. No longer will we be competing solely on price — instead, we will be doing harder and more interesting work, charging a fair amount for it, and making a difference in the world. With our enormous size and expertise, no other company in the world is equipped to match us at this challenging work.

You may be wondering about our new name. We’re changing it effective today to emphasize that our primary mission is helping the community of individual restaurants obatin anything and everything they need — products, services, and knowhow — to best serve their communities according to *their* mission. No more are we shoehorning businesses into the model that works for us. Our job is, when our customers ask us for anything — we say “Yes” and get the job done. The paint fumes which have been wafting into the building today are from our whole fleet of trucks being repainted as you read this.

Now, I know that this isn’t the first time you’ve been told we’re going to make a splash in the SME market, and you may be wondering why it’s going to work this time. The answer is that this time, we are going to change who we are in order to serve this community of customers.

And we are going to start with changing our values.

The two values that are going to define YESCO from now on are transparency and service. This is non-negotiable. If you don’t want to or can’t live to be transparent and of service, then you will be working elsewhere. Perhaps Maryland.

TRANSPARENCY

Transparency is like integrity, turbocharged. It’s not just doing what you think is right, it’s letting the world see what you’re doing and judge for itself.

The words “company confidential” will cease to exist at YESCO. Everything we do, from below the soil to the paid invoices, will be visible to the public.

We will not be able to juice our margins from some customers by keeping our prices for each account confidential. We won’t be selling any of our items under misleading brands such as “White Marble Farms” in order to make people think they’re getting something they’re not.
We will be able to run a successful business this way because we will, from now on, be offering services of such high value that we can openly charge for them, and in the process build stronger relationships with our community of customers.

SERVICE

When you look out the window at our fleet of newly-painted trucks full of items such as meat, produce and paper goods, it’s easy to think that we’re in the business of selling these products.

We’re not.

Here’s how you can tell we’re in the service business: we don’t make anything.

We’re in the business of connecting restaurants with producers who make the products they need.

There are two kinds of products in the world: products that we already distribute, and products that we will locate and distribute if asked.

That’s it. That’s why we’re YESCO. And because we will find and locate anything in the world that will help our community of customers, and be completely honest and open about it, we can charge a reasonable amount for what we do.

SERVICE SPECIFICS

Let me give an example of the kinds of services we will now provide.

Every restaurant in the world has a goal to serve its community in some way. Our job is to understand what specific service that restaurant provides, and what things that restaurant might want to do its job better. At that point — and only at that point — can we work to find and bring the products useful to that restaurant.

In other words, it’s not about finding the product in our book that best suits the restaurant’s needs. It’s about finding the product in the world that best suits the restaurant’s needs. Our book will grow accordingly.

Somewhere in America is a farmer raising American Guinea Hogs on pasture, and finishing them on whey and acorns. Somewhere else in America is a restaurant that wants to serve succulent pastured heritage pork belly rich in good cholesterol. We will introduce the former to the latter.
Somewhere in America, maybe closer to that restuarant, is a farmer with an avocado orchard and chickens and goats and pasture who is looking for a sustainable way to improve his farm and profits. We will find that farmer, tell him about the restaurant wanting to serve avocado-finished heritage pork, and find the experts he needs to begin a successful heritage pig program.
Does the cafeteria at a local tech firm want to upgrade the nutrition of its offerings and support local businesses? We’ll find all the local farmers and artisan foodmakers we can, see what’s available in what seasons, and put together a well-balanced rotating menu of meals for that cafeteria all year long. Does this cafeteria want to start offering desserts made with real free-range eggs and pastured cows’ milk. We’ll find them. If not, we’ll find farmers who will produce them with our help.

Does a large national fast-food chain want to buy every factory pig that Cargill can produce in two integration plants? Heck, that’s easy. We’ll drive those trucks, though in this case we’ll be competing on price so in the long term this is not a growth business.

VALUE AND GROWTH

Speaking of growth — one last note. Our stock price will fall tomorrow, and that’s a good thing. A lot of very naive people operate under the belief that growth is the reason companies exist.

They’re wrong.

The role of a company is to provide a service to its employees, of organizing and marketing their intelligence and efforts so that they make a difference in the world, and provide enough income for the employees to live happily; all while generating enough profit to justify any capital investment in the company by equity partners. Note that growth is not an essential part of this mission.

Growth will often happen as a company becomes more successful; but it is by no means imperative. Investors who buy stocks in hope of growth, and hire and fire executives based on share price, are at best gamblers and at worst strip-mining your effort, value, and goals as contributing members of this enterprise.

Don’t worry about these stock-players. By providing valuable services and charging for them, we’ll all have good jobs serving society, make a good living, and pay off the money invested in our company at a good rate of return. We don’t need to do anything more.

Thanks for your time everyone, and I can’t wait to work with every one of you in achieving these ambitious goals.

Best,Jay

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Hey, if Eric Mangini can do it, why not me?

Independent C-store Market Cries Out For New Distribution Model

Convenience stores are fast becoming stores in name only. Without much notice, most have been morphing beyond traditional fuel, beer and cigarette products into new in-store categories and consumer service offerings. Eighty percent of “C-stores,” for example, now offer some form of foodservice, which is today their fastest growing source of profit. Consider also: C-stores’ in-store (non-gasoline) sales are rising at roughly 10 percent a year.

Emerging From Shadow of Grocery

• Grocery and C-store distinctions are rapidly blurring – over 30% of grocery sales are ‘quick trips’ for purchases of about $20.
• 60% of convenience stores are single-store affairs today – up from 50% in 2000 – and 70% have annual sales under $1million
• 80% of convenience stores today see some form of prepared food concept as key growth driver - $16 billion market growing over 13% annually
• C-store industry profitability up 17% in 2006 - foodservice gross margins 2x average for in-store merchandise

Packaged Goods companies, food service suppliers, broad line distributors, buying groups, food brokers, national wholesale clubs, and an assortment of other players are all jockeying for territory in the great single operator Convenience store land rush.

How can companies break from the pack and leverage new trends in C-store purchasing channels to reach this critical growth market more effectively and economically?

It is no small task. Sixty percent of convenience stores are still single-owner proprietorships. Capturing share in this fragmented, thinly financed collection of filling stations and small town mom-and-pops demands a unique go-to-market approach that integrates suppliers and their carefully managed marketing channel system.

Best Buy Should Avoid Home Depot Strategy as it Targets Business Market

Best Buy is developing strategies for delivering technology solutions to business, education and government customers, with plans to "grow the Best Buy for Business product and service capabilities to deliver simple, reliable and affordable technology solutions." According to Best Buy business customers make up as much as 10% of its overall traffic.

Sound familiar? It will to devoted followers of the home products marketplace. Recall Home Depot's failed multi-billion dollar attempt at cracking the business markets side of home improvement. The come-uppance that ex-CEO Nardelli and crew experienced was of staggering proportions, and will emerge with time as a classic case in corporate strategic naiveté. Key lesson: never under-estimate how fundamentally different business buyer markets are from consumer markets. Similar products do not make for idential channels!

As Best Buy for Business looks forward, they would be wise to recognise the new B2B competitive arena they'll be competing with including CDW, Cisco, Dell Direct, and the traditional IBM, HP and reseller channels. We would certianly not recommend they model their approach after Staples, Office Depot or OfficeMax. Those three are still struggling to figure out if they're consumer or business market players.

The company indicated that the "small business" strategy will be built from specially selected store employees trained to help business customers navigate their purchasing experience in store and provide introductions to additional business resources available from Best Buy.

Small business growth at Best Buy will only be significant (and profitable) when the company provides real, tangible value added to these new customers. The strategic problem with the Best Buy approach is that it reduces the business buyer market to a "ads, signage and labeling" tactic.

Coated Paper Distribution Challenges Drive International Paper Out of Industry

International Paper has thrown in the towel on the coated paper business, and other manufacturers may soon follow. The IP move comes as dramatic shifts are occurring in the physical distribution and decision-making around coated paper products and traditional channel members challenge the status quo system.

Many advisors working with the industry have simplistically reduced the industry's challenges to the cost curve. "The highest cost producer is the first to go...so focus only on M&A activity designed to improve your relative position". If only fixing the coated paper business was that easy!

With margins up and down the publishing chain tightening, printers, brokers, paper manufacturers, and merchants are all moving aggressively to capture and lock in paper positions with end-users.

Channel chaos has increased as a result: merchants are integrating more deeply into end-user paper acquisition processes at the expense of traditional printer reps; printers are striking back by leveraging house paper brands and purchasing power to capture a greater share of their print customers’ paper purchases.

Not surprisingly, this sustained level of channel chaos as well as heightened product commoditization pressures have opened the door to a wide range of price-oriented brokers – paper, printing, and catalog. While paper manufacturers work diligently to remain channel-neutral in these channel wars, their ability to maintain “spec’d-in” or “product-pull” positions with end-users (at attractive margins) is increasingly at risk.

It is our belief that this growing channel turmoil is likely the result of a natural polarization emerging in the marketplace around at least two distinct customer value propositions. For the "print job dependent” end-user, the printer (or print/catalog broker) acts as an “OEM” – paper is inextricably integrated into a finished product (print job) they are selling to end-users. In this situation the end-user wants to provide little or no input to paper selection. Manufacturers naturally tend to treat printers targeting this end-user segment as customers – “OEM customers”.

Another portion of the end-user marketplace, in contrast, looks to get significantly more involved in paper selection decisions, and rely on intermediaries to provide them with sophisticated services that lower the total costs of paper product acquisition. While the paper source may still be a printer, in this case the end-user has un-bundled the printing and paper purchase transactions. As a result, this unbundling creates opportunities for manufacturers or channel intermediaries – such as merchants and paper brokers – to compete with the printer for the paper portion of the business. Paper manufacturers tend to treat both the printers and merchants targeting these end-users as channel partners.

Then there are the myriad channel permutations that fall outside these two models: printer reps partnering on specific transactions with merchant reps (even when the printer rep is under corporate pressure to sell house brands); merchants providing paper buying services directly to large printers (because they offer more sophisticated integrated supply capabilities); independent brokers looking to provide parity end-user pricing with super-large printer “OEMs”; merchants buying up independent paper brokers and blurring the distinction between the two; large end-users working with multiple channels – both printers and merchants – to source paper; traditional “print job-dependent” end-users moving in favor of direct paper purchases; or other “print job-dependent” end-users moving away from large printers such as R.R. Donnelly to spec-in a merchant as paper source.

There are two important observations to be made here. Firstly, it is critical that manufacturers determine the size and attractiveness of the full range of distribution channel segments, and make proactive choices about which segments to target and through what channel system they will be reached. What portion of the end-user marketplace is “print job dependent” versus some other orientation? Which segments are growing or shrinking? What are the implications for ideal channel partners?

Secondly, when there is a discernible distinction between alternative value propositions, there will inevitably be a healthy level of channel competition – especially if end-users can be swayed to move from one orientation (say, “print job dependent”) to another (i.e., “paper involved”). On the other hand, when there is a lack of credible and perceived differentiation between alternative channel value propositions, channel members will increasingly offer unvalued services, perform redundant activities, and focus on aggressive price wars – all of which inevitably leads to undesirable levels of “channel conflict”. Indeed, paper manufacturers are finding that up to 30-40% of their customer relationship time is spent arbitrating extensive channel conflicts.

Winners In this business will design and create a fact-based, market-focused channel system for reaching publishing and corporate end-users. They will develop strategies to address critical distribution channel issues such as:

• How do publishing and corporate end-users segment with respect to their distribution channel needs?

• What channel system value propositions will powerfully differentiate a manufacturer with attractive segments of this end-user marketplace?

• What are the full range of activities required to deliver channel system value propositions to each segment? When should a company look to channel partners?

• When channel partners are the optimal choice for performing activities, how should labor be divided between involved parties?

• What types of channel partners are best suited to perform critical value-delivering activities? How should they be screened, managed, and compensated fairly for activities performed?