Our “new” economy has forced many companies to make tough decisions to enable them to survive. Moving forward, the construction industries are forecasted for slow growth, if any, for a number of years. Getting back to 2007 levels of business volume will not occur for a number of years. The only way to ensure your success is to be the master of your own destiny. To do that, you need a plan.
Many small companies have succeeded for years without a plan. However, if your goal is to profitably grow the business, developing a roadmap — one that can be communicated to all stakeholders (investors, bank, management team, employees and manufacturers) and can be executed with tactical steps — is essential to ensure success.
Planning processes can be as involved, and detailed, as a company would like. Some companies go through an annual, intensive process where they evaluate the market, study competitors, consider macroeconomic information, and require departments to develop plans and budgets (which are then rolled up). Other companies gather the senior management group or ownership to discuss some direction or revenue goals, and then move on.
Planning with suppliers, in many instances, focuses on setting a revenue goal and identifying some desired activities to achieve those goals. Achieving the goal typically earns the distributor incremental rebates.
But many manufacturers say the planning exercise with many of their distributors is futile because the plans sometimes just consist of the distributor e-mailing the manufacturer to set the 2010 goal. Manufacturers tell us that distributors plan with too many manufacturers and that little gets accomplished unless someone is charged with implementation at the branch level. This is not anyone's fault. The reality at the branch level is that branch personnel as well as manufacturers' field people focus on today's customers' needs and have difficulty planning for more than a month in advance.
Manufacturers are looking for selected distributors who can help them grow their business. Some of this could occur through line conversions, but more can be the result of joint partnering to create demand within the marketplace. By taking a broader, more deliberate approach to planning, distributors can put themselves in a much better position to achieve growth in both revenue and profitability and cement tighter relationships with their key manufacturers.
Three Phases of Planning
Distributors should segment their planning into three phases: corporate planning, strategic manufacturer planning and tactical branch planning.
Developing an overall corporate plan is the first step of the process. You and your team need to know where you want to go, how you expect to get there and what is expected of everyone along the way. A collaborative approach and group buy-in is critical.
You should set two corporate objectives — an overall revenue goal and a net profit goal. Everything else flows to support these two objectives.
Revenue objectives should have three components:
Organic/core — these revenues are going to derive from your existing business, including new account development within your core area of expertise. Additional resources to support the growth should also be considered here (additional salespeople, new branches, new services). Growing organically requires that you either gain share at each existing customer or add new customers, or that your customers grow their business.
Price appreciation — this element of revenue growth is something you have limited control over. Most price appreciation comes from manufacturer price increases. Talk to your manufacturers to get a sense of what they expect over the coming year. Weight your overall numbers based upon your business mix (commodities versus standard product).
New opportunities — this area represents diversification initiatives that will stimulate growth. Areas to consider include acquisitions, new market segments, adjacent product categories, calling on different types of customers or other focused initiatives that need to be funded (perhaps establishing expertise in energy efficiency or LED lighting).
Your net-profit objectives should focus on the following opportunities:
Improving your operational performance through enhanced utilization of technology
Reevaluating processes and asking “do we still need to do it this way?” and “how are others doing it?”
Reviewing your price matrix, pricing management and overall pricing philosophy
Managing your inventory
Watching non-revenue producing headcount
It helps if a portion of every corporate manager's compensation is based upon corporate net profitability and branches are measured comparably.
There are several ways of approaching your corporate planning. A planning process could entail a management meeting to discuss your 2010 outlook and opportunities, with departments sharing conceptual ideas to help drive the business next year. This assumes the various department heads have sought input from branches, salespeople, departmental employees, customers and other sources in preparation for the meeting. Good planners keep an ear out for industry trends and insights. Identify secondary research as necessary regarding marketplace macroeconomic information. This broad-scope information must then be rationalized against estimates of revenue and profit potential solicited from your branches and salespeople.
The meeting should seek agreement on strategies and conclude with setting corporate revenue and net profit objectives. Once the plan is developed, it then needs to be communicated to department and branch managers.
Planning with manufacturers
Once your company plan is in place, it's time to involve your manufacturers. There are a couple of ways distributors typically proceed.
One type of distributor will focus their planning on a few key suppliers. These are manufacturers that have a wide reach within the distributor, are considered strategic suppliers and represent a high percent of sales. Typically they are brand leaders and can help find resources to execute a plan. Planning with these companies should be enterprise-wide, setting corporate-to-corporate goals and expectations. Three to five metrics should be developed to jointly measure performance. These objectives should relate to sales, profitability and operational performance.
A key for success is assigning action steps and deadlines to individuals. A plan without accountability is just a sheet of paper. Document your agreed-upon strategy.
Manufacturers have recognized that distributors who have very focused joint planning efforts are stronger distributors and have a greater likelihood of achieving their goals. In fact, manufacturers expend more resources with these companies than they do with others.
Tactical branch plans
Once this enterprise level planning is complete, the next step is tactical planning. Some organizations formalize this, while others leave it to the discretion of field personnel.
Tactical planning is the branch-level planning that occurs between a manufacturer's salesperson or rep and branch personnel such as the branch manager or key salespeople. The tactical plan includes identifying target accounts, inventory management, line conversions, counter days, training events, promotions and price support.
Here again, plans should be documented (no more than one or two pages). Our recommendation is that most of this plan be short-term — either for the next quarter or for six months. Too much happens in a branch to plan much further in the future. It's better that progress be reviewed and plans be refined and then re-executed along the way than to waste effort on an unrealistic plan.
Moving forward, channel resources will become more scarce and allocating them will be critical. We expect to see fewer marketing co-op funds available based upon percentage of sales. Funds will be available, but if you do not have a plan and a defined goal, don't expect funding. Distributors will need to start budgeting a percentage of sales to allocate to their marketing departments. Rebates will also be more performance-oriented.
Electrical manufacturers will proactively but quietly decide to support those electrical distributors partnering with them. Marketing your company to your manufacturers will become more important because you need to capture an adequate share of your manufacturers' attention. Part of that marketing effort should be a plan to create demand for their products.
2010 is expected to be another challenging year. Few expect to see another precipitous fall like the one we saw this year, but no one expects robust industry growth. Growth will come the hard way: by doing the blocking and tackling at the field level and identifying opportunities to take appropriate risks.
David Gordon is a principal of Channel Marketing Group. He can be reached at 919-488-8635 or [email protected]. Allen Ray is principal of Allen Ray Associates, www.allenray.com. He can be reached at 817-704-0068 or [email protected].