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The bad thing about good times

Making decisions when business is good is harder than when business is bad

by Frank Hurtte

Seventh President Andrew Jackson thought like a distributor. Late in life, he summarized his philosophy with this commentary on his decision making abilities: “I was born for the storm. Calm does not suit me.”

In times of trouble, he was master of the world around him. Remember the Battle of New Orleans? Think about this history-shifting situation. Rough and tumble Old Hickory and his rag-tag collection of backwoods militiamen, New Orleans Creoles and a poorly disciplined batch of pirates defeated the best the British Empire could throw against him. In the heat of the situation, Jackson devised a quick strategy to take advantage of local geography and low-cost materials to fend off the attack and turn the tides of battle. The rest was, as they say, history.

Jackson became a hero to the fledgling nation and moved on to become the nation’s leader. His genius under fire was legendary but his ability to handle the issues facing a growing nation were a disappointment to Jackson and many others of the time.

We distributors are of similar disposition. Using our quick wits and largely improvised plans, we maneuvered our way through the worst a recession could throw against us. But now we find ourselves in the calm. The good times are here and they require a new set of decision-making skills. Our ability to maneuver quickly and handle crisis becomes less important as we face a new set of business issues. Unfortunately, deep down inside, many of us find ourselves feeling just a little bit like Old Andrew.

How has the landscape changed for distributors since those dark days of the recession? First, the good news: we are no longer struggling for survival. Sales are up, profits are once more back on track and we are feeling like we’ll be here to stay. But the world continues to spin and the news carries dozens of announcements of mergers and acquisitions. The big publically traded guys are announcing record growth. Seventeen percent seems to be the norm rather than the exception. The economists are singing like mourning doves, chirping out happy tunes of manufacturing growth. Big growth, profitable growth and economic expansion, we don’t have a worry in the world. But we do.

Distributors face issues with business systems, many of which need modernizing. CRM system implementation has been on hold for a long time. Our warehouse efficiencies lag well behind the gigantic “logistics-based” distributors. Even though current results look strong, we still remember nagging issues about the discipline and skills of our sales team. We are faced with thoughts of expansion in both the products we sell and the markets we serve. Finally, we can’t help but notice a not so subtle downward pressure on margins.

I believe making decisions during good times is much harder than bad times. Remember what Andrew Jackson said all those years ago.

Developing your organization’s decision-making abilities must become a priority. It sounds simple. Get the leadership team together, chat a while and then make a few decisions. Here’s the rub: problems don’t necessarily bubble to the surface during good times.

To illustrate, think about the state of your CRM system. First, if you have one, you’re above average in distribution terms. Most organizations don’t. But before you throw your shoulder out of joint high-fiving yourself, answer these questions. How accurate are the names, titles and e-mails in your system? Are opportunities outlined and followed-up using a systematic approach? Does the inside sales department add to the organizational knowledge?

Can you easily pull up activities associated with specific vendor targets for critical planning sessions? Are customers segmented by industry type and specific interests? Just buying expensive software does not equate to a CRM process. Now, here’s the coup-de-grace of decision making: was spending money on CRM software justified?
Some decisions are made around strategic issues. Does this action give us competitive advantage? Do the results add to our standing by pulling in new business,
creating more customer value, or contributing something to the home team, like shareholder value?

When company leadership teams meet, these decisions are hard to discuss. Nearly everyone has preconceived notions based on their own department or historical background. Sales managers want more inventory and faster deliveries, but fail to see how their team’s lack of forecasting skills aggravates the purchasing manager’s ulcers. Decision making without a strategic direction creates management vapor lock.

How should we proceed? I suggest building a strategic plan. It should cover the following points:

What is essential to long-term survivability in the market?
Things like building expansions necessary to keep up with growing sales, business system upgrades, replacing a key employee with retirement plans and dealing with poorly performing or incompatible supply partners must be understood.

What is needed to create a competitive advantage?
What can you do to make your customer’s life easier? How can you make it better and easier to be your customer tomorrow than today? This may translate into new product specialists, additional locations, advanced on-line order entry systems and expanded product offerings.

What can you do to attract additional customers?
Targeting customers for growth and marketing are weak points for many distributors. Do you have a process for identifying potential customers? Do you generate leads via supply partners, trade associations and local trade shows?

How can you make your current systems more efficient?
Warehouse procedures, phone systems, paper flow, elimination of redundancy and product delivery systems should be on the table. Think about technology to replace tedious tasks.

How does your sales model need to be tuned up?
Consider two points. First, is your compensation model designed to perform in a time of inflating prices and decreasing margins? There has been a great deal of research into the topic, and the trends don’t look pretty. Getting away from some of those old models takes time. Secondly, we have seen our business split into two skill sets.

On one end of the spectrum is the need for technical acumen: engineering, application, troubleshooting and general customer-specific problem solving. At the opposite end, customers call for logistics assistance. Bin-fill programs, JIT delivery and inventory assistance and pseudo-clerical tasks occupy this space. The compensation levels of employees to fill these tasks are different too. Are you using $100 an hour people to do $20 tasks?

Are there services you should be charging for?
Trends in North American manufacturing call for more outsourcing, leaner operations and fewer people employed. Demographic trends point to massive retirements of skilled maintenance, technicians and engineers as the baby boomer generation retires. Distributors are being asked to pick up the slack. In far too many instances, we are doing it for free. Something has to give – either our profitability or our move into paid services.

How can you increase your gross margin?
Gross Margin improvement is the single largest impact point for profit improvement. A point of gross margin creates the same bottom-line impact as a five point sales increase. As we enter a time of impending inflation, failure to build a pricing process that guarantees an increase in revenue as unit costs increase will position your company for economic disaster. Imagine what the two additional points that David Bauders’ Strategic Pricing Associates advertises might do for your bottom line?

Further, our own research indicates an interactive relationship between pricing process and other departments. The segmentation required to properly move pricing
forward also improves marketing, sales and customer service process.

Not addressing any of these questions will not put us out of business next year but they will impact our position in five years and beyond. It’s also easy to see how each of these might be postponed, shelved or even filibustered. We’re enjoying some pretty good times and everyone is busy taking care of business.

A final word from Andrew Jackson:

“Take time to deliberate; but when the time for action arrives, stop thinking and go in.”Get your leadership team together, discuss these questions, then stop thinking and start doing.

 

Frank Hurtte, founder of River Heights Consulting,
brings 28 years of distribution industry experience
and a lifetime in sales. Reach him at (563) 514-1104
or frankehurtte@riverheightsconsulting.com.

 

This article originally appeared in the March/April 2012 issue of Industrial Supply magazine. Copyright 2012, Direct Business Media.

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