Tuning Up Your Operations

March 1, 2009
Managing for profit in 2009 will require all your horsepower.

As electrical distributors try to figure out what their business future may look like, many are watching a general business fog roll in around them. Projections for 2009 vary. Some say business will be down 10 percent to 15 percent. Others project flat and even up, expecting to gain market share and grow their business. Some have calculated the impact of the commodity decline and factored that into their projections. For those who see opportunity, now is the time to tune-up your operational platform so you can maximize profitability and capitalize on revenue opportunities.

While the 2009 business outlook is uncertain, two things are for sure — consolidation is about to roll in at a faster pace than the industry has experienced, and distributor bankruptcies and closings will rise significantly. Companies that bet on copper or did not manage their wire business well are lining up to be bought. The tide has turned. If you did not jump into the copper betting game, are managing your purchasing/inventory to operate on current replacement cost and reined in your days sales outstanding (DSOs), you have done part of your job well. Successful distributors have managed their operations and marketing very closely. They stay in touch with market trends and their customers' needs while adjusting their operations to reflect changing customer demands. Here are a few strategies they are employing to do this.

Tune-up your pricing matrix

During the past six months, some of your customers have probably become mis-classified, primarily because their business has slowed or has become virtually non-existent. In the past, their purchasing volume and payment timeliness may have justified preferred pricing. But if their importance to you has changed, they may only need competitive pricing.

You must decide if your pricing matrix reflects current conditions and your current costs. Selling more “stuff” at the same perceived margin levels while your true into-stock price is higher than your current replacement cost is not an effective inventory reduction strategy — it's actually a more effective profit reduction strategy. Through various business cycles over the years, distributors' inventories often become much larger than is required to sustain their sales activity.

Fire unprofitable customers

You should also review your customer base and determine which customers are continuing to pay their bills on a timely basis. This will help you improve receivables and cash flow. Continuing to sell to customers who have extended your days sales outstanding (DSOs) and may eventually convert to a credit card payment hinders your profitability and puts you at risk. How can you protect yourself? No one likes to fire customers, but when they are not profitable accounts for your company, you may have no choice.

Tune-up your marketing efforts

It's more likely your competition and customers have changed and not your market. While salespeople say they are busy, the reality is they are generating less volume from fewer customers. They probably have extra time. Now is the time to consider customer acquisition strategies by proactively managing your sales organization, emphasizing services and reaching deeper into the channel. Customers want to reduce their material and labor costs. What can you do to help? How could you bring more value to a relationship?

An effective way to determine customer needs and wants and to gain competitive insights is through third-party surveys and interviews. From those results you can formulate a plan with your manufacturer on how you take market share. While you may have made necessary expense reductions, how could your remaining resources be channeled into alternative strategies to drive performance? A new view can create new perspectives.

Tune-up your inventory of wire and other copper-heavy commodities

Commodity pricing has fallen through the floor. Wire is the tip of the iceberg and will continue to be managed as it drifts lower. Moving forward this means buying based upon need, not necessarily based upon what your ERP system tells you to do. Copper-heavy products already in stock are a different problem depending upon their velocity for you. Each distributor has a different exposure level. There are several scenarios for distributors:

  • They bought product that requires a rebate, claim back or special pricing authorization (SPA). This means that the distributor bought inventory at a higher price and needs to claim back their profit. It they do not sell it and file an SPA claim on a timely basis, the price of the product is high.

  • They bought product at a net price. This becomes the cost for the distributor. Problems arise when the replacement cost drops, making the net price higher than your current price.

  • Devalued inventory. This is something that most distributors have not been faced with for a long time. The knee-jerk reaction is to take a loss and bring in new stuff. The challenge is that the value — real or perceived — can be a killer. This results in companies taking business below market levels, destroying profits for all.

To manage your inventory, consider finding projects and niches where you can quickly rid yourself of current product. From then on buy tightly. Also consider rerunning all claims and dumping “D” and “X” items and converting them to cash. Smart distributors and manufacturers will take control of their inventory and pricing. They will refuse to meet any price and will frequently seek manufacturer help.

The prolonged depression of commodity prices is also causing manufacturers to reconsider how they handle very large projects. It may well be that manufacturers may bid large projects direct and pay distributors a fee to service the project. Some manufacturers may take over the billing and collections process for large portions of projects.

In the current environment, it's essential to increase productivity to maximize profitability. Opting out of the current recession is not an option. Active participation is an opportunity to develop strategies that capitalize on streamlining operations, managing inventory, emphasizing profitability and targeting sales efforts.

The authors recently conducted webinars for over 40 distributors entitled, “Planning to Drive Profit in '09: 10 ideas that can help you plan for profitability.” Contact them if you would like a copy of the presentation. 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.

Nine Ideas to Help Your Business Survive and Thrive

It's a great time to increase productivity so you have capacity to grow when demand returns and your rate of profit will be higher. Meanwhile, you save expenses now and improve cash flow from higher turning assets. This makes your company stronger and your people more capable. Here are some ideas on how you can improve performance:

  1. Identify and protect your positions at your most profitable accounts.

  2. Define how you measure productivity for your business and each department.

  3. Analyze your business for the best opportunities to increase productivity.

  4. Change processes, the organization and technology based upon profit prioritization.

  5. Increase inventory and receivables turns to reduce asset costs while maintaining demand.

  6. Adjust your pricing strategy to maximize margins while remaining competitive.

  7. Review personnel and overheard expenses, pruning where feasible.

  8. Examine your customer base and find the customers that have staying power and pay their bills.

  9. Seek ways to redeploy resources to fund growth initiatives. Studies have shown that companies that invest in sales and marketing during recessions grow at a much higher and more profitable level when others contract.