The dark clouds of an economic storm are already beginning to brew. Most distributors would describe the economy as mostly sunny. Oh, there are a few scattered clouds here and there. Mostly trumpeted by TV pontiffs, things like unemployment, the Greek debt crisis and political unrest serve to dot the sky with a few isolated clouds. And it seems like we just finished a terrible recession. It shouldn’t be our turn for more of the same just yet.
But this economic thing is cyclical; peaks and valleys are the natural state. Some of the economic prognosticators that follow our industry are pointing to a recession coming in just over a year. Like the weather, there’s nothing we can do about the actual conditions. But sometimes it pays to bring along an umbrella. Maybe it’s time to check out our economic rain gear.
Strangely, the last recession caught a good many people in our industry unprepared. Just like the frog slowly boiling in a pan of gradually warming water, lots of us thought we might dodge the bullet. The bursting housing bubble hit our business, but commercial and industrial business continued. We felt the temperature rise but guessed the storm was only going to hit us with a glancing blow. But sometime around October 2008, the economy stepped off the cliff, and still we imagined the steep decline in our business was just an anomaly, a bad month that might be followed by some better news.
A few of our departed brethren in business waited until it was too late to respond. Occasionally, we still hear their tales of woe, “If only I would have cut expenses sooner. If only I would have realized how big this recession was going to be.”
As one who proudly relates to the Great American Middleman, I wonder – wouldn’t it be nice if more people were prepared this time? Shouldn’t we invest just a few minutes thinking about how we can be better prepared this time? Trust me; your investment won’t put a jinx on the North American economy. And if you happen to be one of the superstitious souls, buy a rabbit’s foot on your way home from the office.
Evaluate Your People
Many companies wait until the throes of a poor economy before they even begin trying to determine which of their employees are top notch versus those who are “warm bodies.” The process works in good times and bad times. However, in good times, we tend to be more forgiving. Money masks a lot of evil and covers known problems in all of your departments.
I recommend serious evaluations of your entire staff. You must create subjective, unvarnished ratings, from top performer to the guy at the very bottom of the performance chart. It’s not fun, but understanding exactly who will never be anything north of a ‘C’ contributor is a strategic skill. On this topic, I recommend releasing the poor performers today, while the economy is good. It’s more humane to release a person while the economy still holds opportunity for them to get a job. You know they certainly aren’t going to help once the winds of recession hit. Plus, there is an added side benefit. This action creates an opening that can be filled at the beginning of an economic downturn with a higher quality person who can contribute.
Get a Little Tougher with Accounts Receivables
Recessions affect customers and suppliers alike. While today’s economic climate isn’t perfect, it’s not all that bad. Companies that are slow to pay or create constant credit hassles around payment turns in today’s market are likely to be the companies who go dark when the next recession hits.
Accounts receivables best practices aren’t just about customer behavior. If the good times have lulled you into not paying attention to single invoices that have gone over the 60-day line, snap to. Experience dictates that disputed invoices from good customers crossing into the 90-day category are less likely to be paid.
Here’s how it happens. The customer holds back payment because their paperwork, delivery documentation or something else disagrees with your records. Often, this involves human recollection. A customer told your salesperson to just slip the delivery under the door or stopped by your shop after hours to pick up the part. Somehow the signature got left off and now three months later you’re trying to piece together the whole story. People forget. The customer’s accounting team pushes back and you … well you give away the sale to keep everyone happy. Attacking the past due invoices soon minimizes the issue.
Maintaining your cash flow is an important part of the business. Getting paid every time in a timely fashion is good business today and essential for survival when the next recession hits.
Evaluate Nonsupplier Costs for Potential Savings and Efficiencies
We should be experts in the art and science of the price increase. Most of us are used to seeing a cool dozen or more price notices from our suppliers each month. At the same time, wholesalers are bombarding us with price increases for nonsupplier purchases. Everything from the cost of ink cartridges for our copy machines to taxes on our property are taking a price hike. But times are good, and we’ve grown complacent.
Remember Illinois’ gravelly voiced Senator, Everett Dirksen? He was fond of saying, “A billion here, a billion there, pretty soon, you’re talking real money.” Well we aren’t talking billions, but we could be talking some serious money. When was the last time you inspected some of these costs? The relative prosperity of the times and the fast pace of day to day activities have lulled us into letting these things pass on through the system.
I recommend the use of one of the many companies such as Expense Reduction Analysts. What these people do is look at current cost outlays for things such as freight, printing, phone services, insurance and other overhead cost items. They use their knowledge of national deals and negotiating points to drive down your costs. These types of organizations operate on a shared cost basis. That being, they split any savings generated for the next two years. This is money that will come in handy during the next recession.
Clean Up Your Inventory
Now is the time to take stock of your inventory. For the past couple of years, customers have put pressure on your team to add new stuff they might buy. Other customers have shifted their product requirements. Manufacturers have introduced new products and convinced us to put together anticipatory stock orders. One result of all of this is extra inventory.
The dollars may be in line; that’s only part of the issue. The real issue comes via unsold items back in our warehouse. If a SKU hasn’t been sold for 120 days, how likely is it to be sold next week? If a part has lazed around our backroom without being sold for a year, do we really need it?
Now is the time to address the problem. You have a much greater chance of talking a vendor partner into making an exception to their stock rotation program today than in the midst of the recession. If the part isn’t returnable, sell it at a discount or take a write-off today. No matter how painful the situation, you’ll be glad you jettisoned the stuff now instead of later.
Build a Sustainable Pricing Process
What’s a price process have to do with a recession? Work done by clients of David Bauders’ Strategic Pricing Associates demonstrates gross margin gain of two full points at the typical wholesaler. A simple two-point gain builds equity value in the distributor and provides a tool for substantially increasing the bottom line. During good times, the extra profits build a cushion of margin. In the heart of a recession, the extra gross margin might be the difference between survival and extinction.
Evaluate Cash and Credit Reserves
Companies that go into recessions armed with either cash or the strong ability to borrow do better than their competitors. Locking in to lines of credit, which extend through the next recession, will give you an additional competitive advantage. Following the strategies outlined above assists in the creation of cash and better credit reserves.
Finally – The Story of the Ant and the Grasshopper
Remember old Aesop and his fables? While most kids were listening to cool bedtime stories from Dr. Seuss, my dad made sure I got a nightly dose from Aesop’s book. It had otherworldly illustrations of characters from the animal world with human features. One story etched into my four-year-old mind was the ant and the grasshopper. And they were both distributors.
One long-legged distributor (we’ll call him Mr. G. Hopper) enjoyed the good economic times. As a matter of fact, he basked in the warm sunshine – fiddling away his opportunities to prepare for anything other than sunny weather, much less a coming recession. His colleague across town (named Mr. Ant) invested in thinking about the future. He worked his inventory, developed his process and made sure everyone worked according to a plan. When the bitter winds of winter blew in a recession, our friend Mr. Ant used the opportunity to buy the assets of G. Hopper and Company. Or at least that’s how my dad told the story.
Frank Hurtte provides Strategic Insight for New Times. He speaks and consults on the new reality facing distribution in a post-recession world. Contact Hurtte at River Heights Consulting via email at [email protected] or via phone at 563/514-1104.