Every Silver Cloud has a Dark Lining: Things to Consider in a Growth Economy
Last week
Industrial Distribution Magazine’s Jack Keough put out a recap the Alan
Beaulieu
First, Alan
and his team at ITR Economics actually tracks indicators tied to our industry;
we’re not talking pie in the sky stuff political puffery (as seen on TV.) They have no political axe to grind. For instance, they continue to make the
point, the winning President has almost zero impact on the economy for the
first 18 months they are in office.
Alan and ITR
Economics are accurate. I have been
following them for something like twenty years.
During that time, they have accurately predicted the ups and downs of our
industry with the greatest of ease.
Further, they called the “Great Recession” of 2008 to within 30 days and
very accurately predicted a number of other ups and downs in the business
cycle. This is pretty big for guys
making a living in the world of distribution.
Finally, the
article was headlined: A Good Year Ahead!
It was late on a Friday afternoon, and, following long ago advice from a
friend, I decided to end the week on a positive note. Good business predictions from a trusted
adviser; you can’t go wrong.
Here’s the
news. The U.S. economy is poised to grow
3.7 percent in 2017 and that rate will extend into the first half of 2018. Quoting Mr. Beaulieu, “We’re going to
experience some good times ahead.”
Further quoting the article, “There are many signs for optimism, he
said, including favorable interest rates, non-residential construction
improving, the rise of employment and wages and banks willingness to lend
money.” This is some pretty cool stuff,
but not without issues for distributors.
Every
Silver Cloud has a Dark Lining
Not to be a
perennial bummer, but all this growth stuff presents a few issues for
distributors. For the next couple of
weeks we will explore issues tied to operating in a good economic times. So, without further ado, let’s explore the
dark lining in what most view as a silver cloud.
Issue
One: Brisk Business Masks Process
Breakdowns
Surging sales
provides stealth cover for many problems.
You lose market share, but since the numbers are looking good you don’t
notice competitors poaching business from some of your accounts. Mediocre sellers post growth dollars and
their lack of skills go unnoticed.
Sellers announce they are too busy for CRM data input. Warehouses get dirty, shelves get
cluttered. Customer returns languish for
months before suppliers are notified and credit received.
Even the
accounting department contributes by allowing aging A/Rs to creep to
unprecedented highs. Costly errors take
place with sloppy handling of manually handled ship and debit rebate
programs. Credits are missed. Money slides out of the distributor’s grasp. We could go on, but you get the picture.
Sadly, the
article goes on to state that “all good things must pass” and we will see a
mild recession in mid-2018. Do yourself
a favor and fix things now, while there is time and money.
Here are a
couple of recommendations. Document your
Insist that
front line managers review their people and measure their performance. Set improvement plans for employees with
lackluster performance with drop dead dates.
It’s easy to postpone handling their issues because you are busy, but
attention to detail will put you in a better position when the economy softens.
Issue
Two: Great Business Climates Distract
from Strategic Thought
Without the
right kind of discipline, distributor types find themselves consumed by urgent
issues and procrastinate strategically critical issues. It feels good to be busy and even better when
busy is tied to the instant gratification of big business. But our world is changing… Actually spinning
faster than ever before. Investing in
strategic issues during good times is more important during upticks in the
economy. Experience dictates, those with
solid strategy go into recession better positioned and rise faster with the
next upturn. Let’s think of
strategically important topics.
I believe a solid
pricing process is an essential part of any strategic initiative. There’s three big reasons why:
- Pricing Process drives bottom line results. The typical distributor using David Bauders’ Strategic Pricing Associates improves gross margin by two points. In some industries, this nearly doubles the bottom line results. For most distributors the gain is still in the 50 percent range. You can’t ignore this size of an increase.
- Company value is dramatically improved. Distributor businesses are valued on a multiple of bottom line profits before tax and interest (EBITA). Here’s a simplified example of how it works. A company putting $1M to the bottom line could be valued at 6 times earnings or $6M. That company increases the bottom line via pricing by 50 percent to $1.5M. Using the same formula, the company is now valued at $9M. Further, our research indicates companies with higher performance than industry norms often attract a higher multiple of earnings. So, the process may actually improve the value substantially more think multiple of 8, which means a value of $12M. Yep, pretty strategic.
- Processes in the sales department tend to interact. Building a credible pricing process requires detailed customer and supplier segmentation; marketing improves. Salespeople are forced to think more critically about the customers they invest time with. Targeting improves. And, sales teams with well-developed targets are 47 percent more effective in reaching their goals
Developing a
strategy for e-commerce and internet-based sales tools should be part of your
strategy. Let me be clear on a point, I
don’t believe every distributor needs to be the next Amazon; however, we do need to understand business is
changing and we need to be on top of
the technologies fueling these changes.
Further, technology is getting cheaper by the day. In many instances, we’ve reached the tipping
point of cost and benefit which allow even small distributors to have some
pretty nice stuff.
Rather than
take the Amazon-clone approach, I think we should look at technologies which
allow your business to be more efficient, more effective and sometimes
automated. Dr. Al Bates of the Profit
Planning Group shared an important point, “More than a third of a distributor’s
customers are costing you 45% of your profits…”
That means you already have a lot of customer’s who cost you money to do
business with. And, in my opinion the
number is growing. This brings us to the
question: What is your plan?
One solution
would be to take advantage of new technologies capable of automating the
process of entering customer purchases orders.
A couple of my clients are using it and report a massive increase in
customer service related productivity.
(I have information if you want to chat about this.) Another solution is eliminating outside sales
contacts with customers by providing a web-portal which allows small (and most
likely unprofitable) customers to serve themselves. The point is you need a plan today in order
to be in position by the next downturn.
Before we
go, this is a multi-part blog
“series”. Next week we will touch on how
good economies impact people. Stay
tuned…
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