Sunday, March 12, 2017

Every Silver Cloud has a Dark Lining – People Issues in a Good Economy

Last week, we explored the distractions presented to management during solid growth economies. Process breakdowns and loss of strategic initiative focus were on our minds.   This week we cover a couple of people related topics which can create roadblocks to success in distribution.  Since people represent the biggest single expense for distributors – actually something like 60 percent of our gross margin dollars go to employees – it’s prudent to explore the potential pitfalls.

Issue Three:  Good Economies Drive up People Costs
One byproduct of growth economies is an overall increased call for good people; the law of supply and demand kicks in.   Since distributors are notorious for poaching employees rather than developing themselves, the prevailing wage goes up.  Sales departments are heavily affected because the business level gives commission paid guys a lift in compensation.  Hiring someone during the upswing mostly sets a new base-line for future compensation. 

The upward push also opens doors of opportunity for new management types.  It’s a bit of a domino effect.  A sales manager gets lured away and new recruits expect more money, even though they lack experience in the role.  The whole phenomenon creates new pressure on the profitability of the organization.

Let me be clear, I am all for employees making money, lots of money; however, maintaining the health of the distribution business is paramount.  Further, any move with employee compensation must be sustainable.  If we have high skilled employees, we need to pay them accordingly.  This means being keenly aware of what one person calls the “current market rate.” 

The problem with most existing compensation plans in our industry is their commission-centric approach.  One study done years ago discovered a direct correlation between length of employment and commission dollars generated.  Sellers attach themselves to big commission checks by selecting their customer list.  As people exit the distributor business, sellers pick up better accounts by attrition.  Here’s how it works:  It’s a good economy, one of your sales people leaves the company.  You know it will be a while before a replacement can be found, so some of the better accounts are handed off to existing sellers. 

Generally, they get a raise because there is no adjustment to the commission percentage paid and they end up keeping the account forever.  Their compensation moves upward just for being in the right place at the right time.  While skill levels, dedication and drive are part of the equation, expediency is often the biggest driver.  It then creates unsustainable demands on bottom line profitability. 

[Note:  I believe it is time to reconsider the whole compensation issue.  I wrote an article here which created of both fan mail and hate letters.  You should check it out.]

Issue Four:  Great Economies encourage us to Hire rather than Redesign
As the economy grows, you can count on stress and strain in nearly every department.  Inside sales will have more calls, the warehouse will receive and ship more, A/R will process more invoices and everyone else will require just one more body to keep the wheels on the wagon. 

It’s easier to march into the bosses office and demand more than to invest in refining, streamlining or automating the existing process.  Conversely, when the coffers are full, it’s easy to just say “yes” and move on to the next problem.  Nevertheless, let’s look back…

For eons, the catch phrase among distributors has been “growth without adding people.”  Yet, after financial reviews of dozens of distributors, most are struggling to simply hold the productivity line.  A good many find themselves slipping in return on investment numbers.  All this after massive investments in “productivity enhancing” tools.  From an outside perspective, payoffs tied to ERP systems, CRM packages and marketing tools have been somewhere between zero and nada.  Why?  Because most of the time, we simply plug the new tool into the old process.

Now is the time to challenge your team to develop plans for doing more work with fewer people.  You can expect pushback, roadblocks and a thousand reasons why things “have to be done the way they’ve always been done” rather than innovative reengineering.   I recommend process reviews and interdepartmental 360 reviews to look for duplication in activity.  

[Read about interdepartmental 360 reviews here.]

Before we move on, allow me a couple of rapid fire comments on the topic of people:

  • Our customers face people issues, too.  According to research done by Plant Engineering Magazine, 64 percent of customers surveyed expect further increases in qualified people over the next five years.  Over half of those surveyed plan to decrease unplanned for downtime through expanded skills training of their teams.
  • Our suppliers continue to struggle with employees.  A good many have built strategic plans around “pushing tasks to their distributors.”  Expect more of the same.
  • If you have somebody with attitude or behavioral issues, get rid of them now.  It’s the humane thing to do.  They have a better chance of finding a job in a good economy and you won’t be stuck with them when the inevitable downturn happens (mid-2019.)

Finally, I am optimistic that next week we’ll cover a few more pessimistic points on plus sized economies.  

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