B. BOARD OF CONTROL

(Corporate Seal) Attest:

"DISTRIBUTION-THE LOGISTICS OF MARKETING"

(By Charles R. Beall, President, National Wholesale Druggists' Association) You know, this trip through the "Chairs"... this progression up through the NWDA Executive Committee... is so action packed, so filled with exciting and time-consuming activities, that I don't suppose the President of the NWDA really realizes that his term of office his days of usefulness as a member of the Executive Committee is drawing to a close until he takes these steps... crosses the stage and stands before the constituents to deliver his Presidential Address-His "Farewell to the Troops," as it were.

I'm sure that every President who has stood on this spot before me has said to himself, "What, if anything, has my year in office brought to this great association and this industry? Will we leave it better or worse for anything we did or failed to do?" Believe me, it's a pretty humbling thought. When you look back at the truly great men who have preceded you and the contributions they have made, you wonder sometimes why you had the temerity to accept such an assignment in the first place.

In planning your remarks for this occasion, you say . . . “What kind of a year has it been? Has it really been a year when our industry has taken meaningful steps toward improvement of the art and science of distribution? Has it been a year when our industry has taken some tentative steps toward the kind of stability that creates an environment for progress?"

This much you do know; it was the year when Wally Werble-writing in the "Pink Sheet"-said: "The wholesale drug business is healthy, highly competitive and may be ready to break out of its traditionally narrow area." "Progressive managements are stabilizing current operations, expanding into new areas-geo. graphically and otherwise, and are preparing to meet the future."

It was the year when Dan Rennick, writing in The American Druggist, said: "The wholesaler is the original man in the middle. He stands between manufacturer and retailer-not as an obstacle but as a cohesive force. It is the wholesaler, for the most part, who sees to it that the distribution process operates smoothly as smoothly as it does in the drug industry."

And. it was the year when Leo McMahon in his editorial in The Southern Pharmaceutical Journal and The Midwestern Druggist, said: "The wholesaler, who becomes the sales manager for his customers-who sells through for his customers who is not content to take an order unless he knows how it is going to be displayed and sold-this wholesaler is the wholesaler of the future! To our manufacturer friends-we say-take a close look at this wholesalernot as a competitor, but as a means of achieving maximum distribution at the lowest possible cost.'

Then, with the reassurance that comes from reflecting upon the words of these expert observers, you go on to ask yourself: "What would my audience be interested in? What can I say to recall to the minds of these industry leaders the ideas or deeds for which this administration may be remembered?" Then, you begin to think about the great addresses of the past that have been given at this same lectern. Those addresses which have been quoted and requoted down through the years at practically every drug meeting everywhere, whether manufacturer, wholesaler or retailer. What are some of these expressions which occur and recur down through all of these talks until they have become the truisms of the industry?

Remember when you first heard such expressions as ... "Loyalty to the wholesaler". or about the wholesaler's loyalty to loyal suppliers? And how about the wholesaler's "Profit Squeeze" . . . or the "Crumbling traditional discount structure"... or the concern for the economic life of the independent retail pharmacist... or the "High cost of direct or dual distribution?"

You might say that these reflected a disappointment by the speaker at the lack of understanding, the lack of appreciation for, the lack of genuine knowledge about the value of the full-line, full-service drug wholesaler. But to me

it goes even deeper than that. It reflects not a disappointment at the lack of understanding and appreciation for the full-line, full-service drug wholesaler or for any drug wholesaler or for wholesaling itself for that matter. But rather a disappointment at the failure of an industry as a whole to agree on the importance of distribution itself. It seems to me that until we can agree on what distribution is, how can we agree on who should do what and for how much.

I've heard our good, friendly suppliers talk about cutting the cost of distribution until it's no longer amusing or original. They begin by saying something like this, "You know, if we are going to keep the government out of the drug business, you and I are going to have to find a way to cut the cost of distribution." When you pursue this line of discussion a little further, you'll usually find that what he is really saying is, "I have no plans for cutting my profit, so we've got to find a way to cut yours."

When you ask many seemingly sophisticated people in our industry, for their personal definition of the term distribution, you'll wind up with a lot of words ranging all the way from the simple act of wholesaling itself to something called creative marketing, whatever that is.

So, let's see if we can agree on a few things that are needed. First, there is the need for a clear definition of distribution itself. Second, there's the need for a true appreciation of the functions involved in distribution. Third, there is the need to take a good look not only at the high cost of distribution but the low cost of distribution. Fourth, there is the need to establish those improvements which can be made and to determine who should make them. And, fifth, there is the need to develop an industry-wide plan of action for more effective

distribution.

Now I've been told this prejudice is really as old as human history and the beginnings of commerce.

For instance, even in the advanced civilization of Ancient Greece, you could not become a citizen of Athens if you engaged in trade. Despite the fact that traders helped to create the great classic cities of the great days of Greece. They were not allowed to spend a night within the walls of Athens. The Greek word "Kapelos" meant, they tell me, "A dealer, a tradesman, a cheat, rogue or knave." In the great period of Roman world dominance, great advances were made in commerce, but even the Romans didn't view trade or traders favorably. During medieval times, trading was generally considered illegal even immoral because it viewed as a sin by the Church, being considered a form of usury. So, as you can see, distribution and the prejudices against it and the lack of understand ing of it, its functions and its costs, go back into ancient history. But what about today? Is distribution today really free of the prejudice that has plagued it throughout the ages? I think not, and I think that this lack of understanding. this historical prejudice against distribution and its place in marketing, is influencing the business decisions of many men who should know better.

You know the cost of distribution consumes more pennies out of every dollar the consumer spends than any other single item that goes into the cost of every product that is sold in drug stores. People are continually talking about this high cost. They're saying we've got to change this.... We've got to find a way to lower that cost. Yet, I honestly believe that there is less genuine understanding of the functions of distribution, less time, less money, less study, less research elements of cost put together. For example, I doubt there is a businessman in spent on distribution, and much more is taken for granted, than all of the other this room who would try to handle his own legal problems alone. There is not a execute his advertising campaigns without outside expert help. He wouldn't company president in this room who would permit his organization to plan and undertake even the preparation of his own profit and loss statement without the guidance of a professional accountant. And yet, everybody is an expert on dis

tribution. If you don't believe it, just ask them!

I can promise you that if I were to ask fifty people in this room the question, "What is distribution?", I'd get fifty different answers. I call distribution the to the consumers' hands. Like that professional accountant, like the law firm and those functions necessary to move products from the end of the production line "Logistics of marketing." By that I mean, distribution encompasses (to me) all the advertising agency, there is a specialist in distribution. Of course, I'm talk ing about the wholesaler. Now he doesn't perform the whole job in his field any distribution is a big one, a vital one. His job is the creation of mass availability more than these other experts, these specialists, I've mentioned. But his role in at the retail level. That mass availability that is so desperately needed by today's mass producers and mass marketers. Because he is a specialist, he can usually

do the job better, usually in the long run at lower cost.

In the past year, there have been some most heartening things taking place in this industry to my way of thinking. For one, I can see very definite signs-some no bigger than a ray of light on the horizon the size of a candle-but some very definite indications that manufacturers are, at long last, taking a practical, down-to-earth look at distribution, its functions and its costs.

You know, more and more of us wholesalers have come up with some sort of a program for rating our suppliers. That is, we know we don't have the time or the physical or financial capacity to be all things to all people. We know that we can't give the same selling support, the same inventory investment support to every one of our suppliers; so we must have some means of deciding where this selling and inventory support should go. In order to decide that, we've come up with relative profitability studies on the profit, the potential and the policy of a manufacturer. This has helped us to say that we can give selling support and inventory support in direct proportion to a manufacturer's use of a wholesaler.

Of course, we recognize that in order to give extra support to one supplier, we simply must take away or deny such support to those who fail to achieve a high enough rating. Any wholesaler, who sets up a manufacturer rating system, must recognize this as a two-edged sword. If we rate our suppliers, we must expect, in turn, to be rated ourselves.

This, then, has led manufacturers to consider (or even to come up with) what has come to be known as a "functional discount." I don't know why, but this seems to have taken on a connotation of a “dirty word" in the industry. Frankly, I don't think we should worry about functional discounts, because we firmly believe that a wholesaler should be paid for all functions which he performs. And by the same token the manufacturer has every right to expect, even demand, those services for which he is paying.

Another reason that functional discounts shouldn't frighten us, is that, gentlemen, all discounts are functional, truly functional, or they will not long exist. If a manufacturer is paying for services he is not receiving, somebody will come along and squeeze the fat out of his pricing structure. If some wholesaler is being paid for services he's not performing, this then leads to some of the problems we have in our industry today. It's my personal opinion that none of us should be afraid of this trend. It's essentially a healthy one. In the past, some wholesalers have made the mistake of insisting on being paid according to an established profit structure within entire product categories. This practice has led sometimes to the creation of unrealistic profit structures that do not take into account the elements of cost that we wholesalers and our customers incur in order to achieve the necessary distribution. It has led to a situation where one manufacturer in a product category may provide a completely adequate profit structure and yet other lines in the same category with similar volume would actually result in a loss to the distributor at even twice the discount, because of the peculiar nature of handling the products in that line in order to achieve the necessary distribution.

This means then that any wholesaler is living in the past if he is not taking a good look at every line he handles-its profitability, its distribution policy and its volume potential-and assigning to that line the services that it deserves. Every wholesaler must work out for himself the cost of the services he provides and assign those services to the lines that earn them. No longer can we be satisfied to perform only the basic functions of wholesaling-breaking bulk, filling orders, delivering and extending credit and then offering these services to all who come along. The drug wholesaler of today and tomorrow must understand the value of each of his services and then extend all of them only to those products which warrant them.

None of us should automatically oppose change. Just because something represents a new method, a new approach to our way of doing business, doesn't make it automatically bad. Change itself is inevitable. We can slow its inexorable pace or speed it up or modify it, but we can't stop things from changing. And those changes that are most meaningful are the changes that we make in self-concept that is how we feel about ourselves. Changes in the sense of mission of our business organizations. For example, not long ago the railroads in this country scoffed at the upstart airlines that were beginning to carry passengers. The railroads saw this new competition as bearing no relationship to their mission in life. After all, they were in railroading and no one could beat them at their game. But what they failed to see was that they weren't really in railroading at all. they were in transportation. You all know the rest. Today over 80% of all passenger miles on commercial carriers are on the airlines.

For another example of the danger of a too rigid self-concept, take a look at the movie industry. They barely escaped being totally ravaged by television. All

of the established film companies went through drastic re-organization. Some simply disappeared. They got into trouble not because of TV's success, but because they defined their own business incorrectly. They thought they were in the movie business when actually they were in the entertainment business.

I'm sure you could think of other businesses that have suffered from an incomplete and inaccurate picture of their role in society. In the light of many such examples that exist in recent business history, shouldn't we ask ourselves if the title "Wholesale Druggist"-in its most rigid interpretation-doesn't actually lead to the possibility of just such a dwindling role in the economy. I believe that whatever we call ourselves, whatever we may think we are, we must perform as specialists in distribution or we will not long endure in the marketplace.

Along with this underlying change in self-concept is the necessity for the wholesaler to see himself not as a customer but rather as the extension of the field organization of those suppliers who earn his full support and then to go on and make something happen for every one of them in every territory.

I recognize that these are deep changes in attitude and in performance for the traditional full-service drug wholesaler, but I urgently recommend them.

To help you take that kind of a basic view of our business-Alex Guerry and his very active Business Program Committee have organized this year's program along a little different line than in past years. Alex has worked tirelessly and imaginatively to bring us some fresh and dynamic points of view about our business presented by a distinguished roster of speakers today and on Wednes day and Thursday. You will hear about functional discounts, manufacturers' practices that increase distribution costs, supplier rating programs for wholesalers, retailer services, and so on. We'll take a good hard look at all of these vital, dynamic and changing areas of our business in the next three days. Today, for example, I'll be assisted by the editor of the Harvard Business Review and a professor of marketing from a leading university in establishing the background-the situation in distribution, particularly drug distribution as we see it.

On Wednesday, we'll take a look at what we call an "ideal distribution system"-as seen through the eyes of three people. . . . a consumer products manufacturer, a pharmaceutical manufacturer and an advertising executive. Then on Thursday, three leading wholesale executives will button it up. They'll tell us what we as manufacturers and as wholesalers must do to take steps toward the ideal distribution system that we all want.

Because it is a three-part program-it's like a three-legged stool. For it to stand up for you to make the most of it, you'll have to plan to attend each of these three sessions. We guarantee you'll find it worth your while. The competence of the speakers and the vital nature of their subjects will make it worth your while. If distribution really is our most important product, it's important to you to hear what the NWDA and its members, both Associate and Active, are doing to improve this product.

I'd like to express my personal hope that after my year as your President. we leave this great association just a little bit better than we found it. I hope that a consensus of opinion in years ahead will say that, because this administration passed this way, the year 1964-1965 will be looked upon as one of those years when the drug industry took a new, better, more honest look at our dis tribution system and began to take constructive steps to make it more efficient and more effective.

I hope it will be remembered as the year in which it was agreed by the entire industry that the problems of distribution are not just the problems of wholesaling. That these problems, while they certainly lie with the wholesaler, also lie with the manufacturer and the retailer and the advertising industry-all of us who touch or affect merchandise all along the way from the end of the produc tion line to the hands of the consumer. We must face up to the fact that the other man's problems are our problems as well. We can't shrug our shoulders and say, oh well, that's his problem. If it affects distribution, sooner or later it's going to affect us all.

This reminds me of a quotation some of you have heard me use in the past-a statement attributed to Martin Niemoller, head of the German Protestant Church during Hitler's rise to power. He said, "In Germany they first came for the Communists, and I didn't speak up because I wasn't a Communist. Then they came for the Jews and I didn't speak up because I wasn't a Jew. Then they came for the Trade Unionist, and, of course, I didn't speak up because I wasn't a Trade Unionist. Then they came for the Catholics and, of course, I didn't speak