While President Obama sees glimmers of hope and Herm Isenstein of DISC Corp. forecasts electrical revenues to drop 25 percent across all sectors, distributors are trying to hold onto their businesses and, in some instances, benefit at the expense of others. We've spoken to distributors who are down 30 percent to 40 percent and have reduced their workforces commensurately; others are dramatically reducing inventory and closing branches. Conversely, some electrical distributors are identifying niches for themselves, diversifying, investing in their business and taking market share.
By now you've recognized that the world isn't totally falling apart. Sure, credit is a huge challenge right now, but you know the state of this economy won't last forever. The question becomes, “Can your company persevere?”
Yes. Part of the answer to that question comes from asking another question: “What type of company are you — a cash-flow company, or a company that plans to grow and prosper three-to-five years from now?” The answer to this question determines your action steps. While both types of companies need to manage costs, one does it for survival, the other can consider reallocation of resources. Proactive distributors have plans in place to retool their businesses. One workable plan is what we call “the 4 Rs of driving growth in a recession.”
Review Your Company
The electrical business has changed quickly. Counters areas are quiet, more people are chasing the same order, special pricing authorizations (SPAs) are increasing and margins are being driven down. Days' sales outstanding (DSOs) and write-offs continue to rise. We have all seen layoffs, branch closings, inventory reduction, frozen payrolls and stagnant capital investments. Your customers are obviously being affected by the economy, too, and are having similar problems with profitability. Because customers are ordering less, they are increasing administrative costs per order. This can affect the level of service and pricing that you should commit to them and it may need to be changed. This is why you need to re-review the following key aspects of your operations:Product mix and inventory by product category and velocity
While reviewing products, remember that your inventory is a non-performing asset until it sells. If you can't sell it, eliminate it (or find someone who knows how to use eBay, contact surplus distributors or donate it to a local cause).Pricing
How you price product is critical for your profitably because you can't grow if you just churn cash.Customer profiles
Review each customer's sales, gross profit, transactional needs and receivables. Exception reporting can identify underperformers.Market segments
Ask yourself: Are all segments down equally? Are some niches performing better that could be further resourced?Purchasing re-order points
Review purchasing re-order points and make sure they are set for today's business and not the business of three-to-six months ago.Suppliers
Evaluate the profitability of the business you place with your suppliers, as well as any special deals you may have with them. Ask yourself, “Why am I important to this supplier in my marketplace?” Proving and communicating your worth can help you capture attention and resources.People
Personnel is unfortunately still an issue for some companies. Pruning may be necessary, especially if those individuals are underperforming or do not have the ability to transition into an area where there is potential for growth and profit.Processes
Do you still need to do what you did, the way you did it, with less business and less profit? Downturns are an opportunity for process innovation — especially if it can improve profitability.
Once you have conducted a review, then decide which changes are needed to adapt to the current marketplace and to ensure long-term growth.
Sometimes to move forward you need to take a step back. Many companies have done this through layoffs, closures, inventory reductions and more. If you haven't, you are one of the few growth companies in the electrical market. To retrench you need to understand your market, competitors and objectives. Are you suffering or is the market suffering? If it's you and not the market, why? If it's the market, use the information from your review to right-size your business. But don't throw the baby out with the bath water. If some segments are doing well, resource them for growth — they may be paying for the lights to remain on.
This is the hardest part of managing in a recession. Quick implementation of a retrenchment strategy is key to ensuring future profitability. Without quick implementation, profit can hemorrhage for a long time, threatening the entire company.
Once you have done triage, streamline your customers and operations to focus on profit. This sometimes requires more involved sales management. Understanding customer financials, listening to their needs, directing your sales force and creating new opportunities are critical. Listening to customers and integrating their feedback into your strategies is more important than ever.
From a process viewpoint, now is the time to create some work groups in your company and ask, “How could we do this better?” One of the reasons for this is that as customers continue to receive lower prices, they will become accustomed to these prices. With limited ability to increase selling prices and margins, distributors will need to reduce their current operating expenses by two points to ensure long-term profitability. There are several places where you can streamline:Out-of-date pricing matrices
It's not uncommon to find price matrices that have not been reviewed in several years. You may be selling product below your into-stock cost without a SPA to claim back your profit. When was the last time you reviewed this, or at least reviewed the pricing you offer key customers?SPAs
SPAs are time-consuming and many claims go unattended. This generates lost profit as well as lost cash flow, forcing higher bank loans. How can you change this?Unprofitable customers
Most companies have customers that have become unprofitable. While we don't advocate “firing” the customer, maybe their pricing needs to be adjusted. Or, if they have extended DSOs, file liens and help them find another supplier.Sales
Evaluate your sales by asking several key questions: How many new accounts have we opened? Are my salespeople capable or confident they can find new business? Are we receiving “our share” from existing customers? What don't we sell them? Some distributors are actively seeking to hire top performers from competitors. Top salespeople may be wondering if their company will thrive in the future; perhaps their companies' compensation plans have changed. And unfortunately many quality people are unemployed. Opportunities still exist to hire quality people.
Once you are sure your company will make it through the recession and emerge positioned properly for the future, communicate this to your employees. Show confidence and explain to them how you plan to succeed. Some distributors who have made this speech basically say, “The market is challenged, we see opportunities, and here is how we are going to move ahead. There may be some unpleasantness, but we are looking at the long-term and will emerge stronger.”
Then look for the growth areas. For example, one New England distributor had to reduce the workforce on the industrial side of its business, but hired people with an energy background to build business in the green market. Some companies are focusing on government opportunities; others see profit in safety products or are expanding their reach in the online arena.
Process innovation will be the key to future sustained profitability. When you review your business, be sure to look at your operational methodologies. If you've upgraded your ERP system in the past few years or are currently doing so, you will be happy to discover how many new capabilities are now standard in these packages. Make sure you use them, because when used effectively technology can reduce your operating costs. One distributor didn't realize their ERP system could send invoices via email. They are now sending all employee invoices for material that employees purchase for themselves via email and the credit department is asking customers if they would like their invoices via email. The company conservatively estimates it saves 50 cents per invoice and improves its cash flow.
You may also want to consider services that could be outsourced if they save you money or generate money for you. It's also important that your information technology (IT) people are talking to other IT people.
Relaunching is really about taking action. Reviewing and developing strategies is nice, but in this economy, action and implementation matter most. Distributors who procrastinate will quickly find their cash-flow situation has deteriorated and someone in the market is taking their business. Now is the time to position yourself to grow. Companies that invest in sales and marketing in recessions generate greater sales and profit increases during and after the recession. The key is planning and taking the right action steps:Communicate and involve your people
Aside from capital, they are your greatest asset and will be the ones who need to execute the strategy. Inspire confidence and you will be rewarded.Niche your business
Capitalize on your growth opportunities while managing your core business. Every market is a local market. Where are the growth areas in your market? Identify target markets that you can pursue and accounts you can develop.Recognize that the key to differentiating yourself and driving demand is positioning your company
Effective marketing is critical to success. Marketing isn't solely marketing communications and promotions. Consider outside market research, strategy development with return on investment justification, data analytics, merchandising, lead generating and the use of e-marketing to name a few. Few companies market well, but it represents an opportunity to grow the business.Act decisively
Make your competitors react to you. Always have initiatives to pursue new markets or to penetrate existing ones. You may have heard of the concept of “death by 1,000 cuts.” How can you impose this on your competitors to grow your business? Growing in a recession is challenging but not impossible. By re-orienting your company you can prosper.
Allen Ray is principal of Allen Ray Associates, a consulting firm that helps companies improve profitability through effective pricing strategies and streamlining business processes through effective e-business utilization. He can be reached at (817) 704-0068 or [email protected]. David Gordon is a principal of Channel Marketing Group, a consulting firm that develops market share and growth strategies for manufacturers and distributors. He can be reached at (919) 488- 8635 or [email protected]. Visit their industry blog at www.electricaltrends.com for more insights into growing your business profitably.