The Joys of End of Year Planning

Several years ago, Jenny tied the end of year planning season

to the dreaded Mid-Western season of raking leaves.  The two share several similarities.

Here is the shortlist:

1. Leaf raking and annual planning are dreaded by most people.

2. You never really get into a zone, because by the time you get into the groove the work is done for the year.

3. If you ignore either one, next year you will regret it.

4. The longer you put the activity off, the harder it will be to finish.

5. An early start saves a lot of work at the end of the season.

One big difference is this:  You can’t hire a neighborhood kid to do your end of year planning.  With this point in mind, we thought we would share a few things to think about for your 2022 plan.

If you are planning for 10 percent sales growth, you better think again

Reports from across half a dozen industry sectors indicate that manufacturers are laying down a steady stream of price increases.  One distributor told us over 75 percent of their suppliers have passed along two price increases in the past 12 months and are signaling more to come.  The combined total for the last year approaches a double-digit price increase.  

The days of holding prices steady for a year are over.  As companies discover their customers provide no pushback on anything less than five percent, many of our supply partners plan to steadily, and perhaps routinely, increase the cost of their products.

What this means:  Price increases alone should power sales growth of 10 percent.  The question really is: “How much you can grow your business over the normal market growth?”

Expect the cost of labor to increase

The cost of three types of people will outpace the growth of sales in a major way:  

1.Warehouse and logistically focused salaries have expanded at unprecedented rates.  Most distributors indicate the cost of an entry-level person in this part of the business has grown by 25-30 percent since 2019.  Once a new person is added at this higher rate, you can count on a need to increase similarly for existing employees. 

2.Customer Service is another area where our research tells us to expect increases.  While not quite as dramatic as those for the warehouse, research indicates we might expect a 20 percent bump in people costs here.

3.Engineers and Technicians, while already highly compensated, may require a 10-15 percent bump in the coming year.  This comes after a considerable escalation in the market since 2015.

The cost of other things

First, every visit to the gas station reminds us the cost of operating vehicles is up – way up.  Estimates are something like 40 percent, but this number truly impacts more as trends toward in-person visits to customers are on the rise.  More customer visits mean more fuel costs.

Freight costs are escalating as well.  In the case of most shipments, it is a combination of fuel and increased driver demand.  However, if you purchase anything offshore, the cost of container shipping has soared since early 2020.  Reports from several manufacturers, who regularly bring in containers, point to a 400 percent increase in costs there.

So, what should your plan include?

We have shortened the list for the sake of time and space but here are a few points:

1. If you plan on increasing market share and growing a relationship with your competitors, the growth must exceed your view of inflation during the coming years.  We believe it is reasonable to expect that selling the same amount of product will generate at least a 10 percent increase in sales revenues.  If you would normally project a 10-15 percent increase, the new number would be 20-25 percent.

2. Review your profitability with labor costs which have increased by 10 percent.  Now is the time to work on automating or improving operational processes.  For example, when was the last time you reviewed your inside sales operations, warehouse, or other back-office workflows?

3. Understand the cost of handling small orders.  Now may be the time to set minimum order sizes for at least some of your customers.  

4. If possible, ask your suppliers for advanced notice on price increases.  There are many reasons, but you must be able to budget the time required to load new prices into your computer system and give customers the required notice.

5. Don’t just pass along increases, add something for the home team.  Now is the time to pad price increases with additional gross margin.  

6. Review all pricing agreements with customers.  It is no longer possible to hold prices for any length of time.  If you have longer range (annual or bi-annual) agreements, you have little choice but to renegotiate them.

7. Review your terms and conditions of sale.  If the parts you sell are subject to long lead times and rapid price escalation, should you accept orders based on your current price levels?

If ever there was a year for planning, this is it.

Planning procedures vary.  Most distributors develop some sort of plan/forecast for the future, but the process is still rudimentary for many.  Does your plan involve benchmarking data like association ‘PAR’ reports?  We have lived in an environment where inflation has been negligible, but it’s here and adding a new dynamic to the situation.  

It’s hard NOT to have questions this year while you start to look at what is coming next.  We’re here to help!  We have a number of free and low-cost tools to make this year’s plan the best yet.  Reach out to us today!

Frank Hurtte is the Founding Partner of River Heights Consulting.  When he's not begging the neighborhood kids to rake his steep hill of a yard, Frank provides practical expert advice to knowledge-based distributors and their manufacturer partners.  

His easy-going demeanor and “Iowa-speak” make him a relatable favorite among speakers.

Email or call today to see how River Heights Consulting can take your distributor business to the next level.

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