Monday, March 6, 2017

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
economic report as delivered to the National Association of WholesaleDistributor (NAW) Executive Summit.  I was immediately attracted to the article for three reasons.
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
processes now.  No need for flowery wording, just put together an outline or a flowchart.  Measure your compliance to the process.  Review process improvement (as well as sales growth) during company meetings.

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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