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Four Rs to profitable growth

Growing in a recession is challenging but not impossible. Follow these four Rs and prosper.

by Allen Ray and David Gordon

President Obama sees “glimmers of hope” and many economists see some level of economic recovery in the fourth quarter. Meanwhile, distributors are trying to hold on to their businesses and, in some instances, benefit at the expense of others. Industrial distributors have been especially hurt with plant closures in the West and Midwest. We’ve spoken to distributors who are down 30% to 40% and have reduced their workforces commensurately. Others are dramatically reducing inventory and closing branches. Conversely, some are identifying niches for themselves, enabling diversification, investing in their business and taking share.

The difference is what we call “the 4 Rs to profitability.”

By now you’ve recognized that the sky isn’t falling and hopefully your rate of decline has moderated. The biggest challenge is the lack of credit, which hampers customers investing in their business as well as distributors talking more frequently to their banker. Some companies have had lines of credit reduced due to inventory and cash flow issues. Intuitively we know this won’t last forever. The question is, “Can your company persevere?”

Part of the answer comes from asking another question, “What type of company are you? Are you a cash flow company or a company that plans to grow and prosper three to five years from now?” The reason this is important is that it determines your action steps. While both types of companies need to manage/cut costs, one does it for survival, the other can consider reallocation of resources.

Review your company
The business has changed, and quickly. Most companies have undergone some level of operational surgery. Layoffs have occurred, branches closed, inventory reduced, payrolls frozen, capital investments stopped. Concurrently, many distributors’ customer profiles have changed. This could affect the level of service and pricing that you should commit to them. They are ordering less, hence increasing administrative costs per order, counters are quiet, quotations are up as more people chase the same order, and margins are being driven down. Meanwhile DSOs and write-offs continue to rise. Customer profitability has changed.

This drives the need to re-review your inventory strategy to improve cash flow and question inventory commitments you have made to customers. Your review should encompass:

• Your current product mix and inventory by product category and velocity. Remember, 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 excess distributors or donate to a local cause).
• How you price product is critical for you to profitably grow and not just churn cash.
• Review customer sales, gross profit, transactional needs and receivables. Exception reporting can indentify underperformers.
• Consider the market segments you serve. Are all down? Equally? Are there niches that are performing better that could be further resourced?
• Review purchasing re-order points. Are they set for today’s business or the business of three to six months ago?
• Evaluate the profitability of your suppliers as well as the “deals” you may have. Ask yourself, “Why am I important to this supplier in my marketplace?” Proving and communicating your worth can help you capture attention and resources.
• Review staffing levels. Pruning may be necessary, especially if some individuals are underperformers or do not have the ability to transition into an area where there is growth/profit potential.
• Evaluate your 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 (and another definition of profit is reduction of loss!)

Once you have conducted a review, you may decide that change is needed to adapt to the current market place to ensure long-term growth.

Retrench
Sometimes in order to move forward you need to take a step back. Many have done this through layoffs, closures, inventory reductions and more. If you haven’t, you are one of the few growth companies in the market.

To retrench, you need to understand your market, your competitors and your objectives. Are you suffering or is the market suffering? If it is you and not the market, why?

If it is 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 there are segments that are doing well, resource them for growth as they may pay 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, prolonged profit hemorrhaging can occur, threatening the entire company. It’s unfortunate, however, it’s critical. And for some companies, this must be done multiple times to keep up with sales and profit declines.

Once you have undergone triage, it’s time to streamline your customers and operations to focus on profit. This requires more involved sales management. Understanding customer financials, listening to their needs, directing your sales force and creating new opportunities are critical. Listening to the voice of the customer and integrating that into your strategies is more important than ever.

From a process viewpoint, now is the time to create work groups and ask, “How could we do this better?” A longer-term reason for this is that as customers receive lower prices, they become accustomed to lower prices. With a limited ability to increase selling prices and margins, distributors need to reduce operating expense to ensure long-term profitability.

Some places to look for streamlining include:

• Review price matrices. You may be selling product below your into-stock cost. When was the last time you reviewed your matrix (or reviewed key customers)?
• Most companies have customers that are unprofitable. While we do not advocate “firing” the customer, maybe their prices need to be adjusted. Or, if they have extended DSOs, file liens and help them find another supplier.
• From a sales perspective, how many new accounts have you opened? Are your salespeople capable or confident enough that they can find new business? Are you receiving your share from existing customers? What don’t you sell them? Some distributors actively seek to hire top performers from competitors. Salespeople may be wondering if their company will thrive in the future, or compensation plans may have changed.

Re-evaluate
Once you’ve decided that your company will be in business long-term with higher revenues and profits, communicate this to your employees. Show confidence and show them how you plan to succeed. Essentially 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.”

Look for the growth areas. Industrial customers have reduced their staffs but they still need to do preventative maintenance, need to save money, are interested in “green” products and more. What services could you offer to support them? For some services, you can be compensated through product sales, others could be fee-based.

Process innovation will be key to future sustained profitability. When you review your business, include a look at your operational methodologies. If you’ve upgraded your ERP system in the past few years, or are currently doing so, recognize that there are many new capabilities standard in these packages. Make sure you use them. You can reduce operating costs through technology. Ensure that your IT people are networking with other distribution IT people.

Consider one distributor that didn’t realize its ERP system could send invoices via e-mail. It sends invoices for material that employees purchase for themselves via e-mail, and the credit department is asking customers if they would like their invoices via e-mail. Conservatively, it saves 50 cents per invoice while improving cash flow.

Reinventing the way you look at your business creates new opportunities.

Re-launch
Re-launching is really about taking action. Reviewing and developing strategies is nice but successful companies know that action and implementation is everything.

Those who procrastinate will quickly find that their cash flow situation has deteriorated and that someone is taking their market share.

Now is the time to position yourself to grow. In fact, companies that invest in sales and marketing in recessions, after restructuring, generate greater sales and profit increases during and after the recession.

Keys to action include:

• Communicate and involve your people. Aside from capital, they are your greatest asset, and will be the ones who execute the strategy. They also are the ones who can enhance the strategy. Inspire confidence and you will be rewarded.
• Niche your business. Capitalize on growth opportunities while managing your core business. Every market is a local market. Where are your growth segments? If you don’t know, ask around. 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 just marketing communications and promotions. Consider outside market research, strategy development with return-on-investment justification, data analytics, merchandising, direct and database marketing, lead generating and e-marketing to name a few. Few distributors market well. This represents an opportunity.

Recognize that speed kills and can be deadly, especially to others. Make your competitors react to you. Always have initiatives to pursue new markets or to penetrate existing ones. Be known as the idea source. 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 (www.allenray.com). Allen Ray Associates helps companies improve profitability through effective pricing strategies and streamlining business processes through effective eBusiness utilization. Allen can be reached at (817) 704-0068 or allen@allenray.com.

David Gordon is a principal of Channel Marketing Group. Channel Marketing Group helps companies develops market share and growth strategies for manufacturers and distributors. He can be reached at (919) 488-8635 or dgordon@channelmkt.com.

Visit their electrical industry blog at www.electricaltrends.com for more insights into growing your business profitably.

This article originally appeared in the July/August 2009 edition of Industrial Supply magazine. Copyright 2009, Direct Business Media, LLC.

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