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Dealing with an Extended Recession: What Now?

"If we could first know where we are, and whither we are tending, we could better judge what to do, and how to do it." - Abraham Lincoln

by Neil Gillespi and Allen Ray

Neil Gillespie

Allen Ray

The recession is lingering, and most distributors are reticent to peek out from under the rubble and get on the growth path again. It makes little sense to invest in more inventory, facilities and people unless the volume is going to be there to pay for it. Or perhaps that is the sentiment of many distributors, daresay most of them. Or is it?

That’s what our survey of wholesale distributors aims to find out. We also aim to find out what distributors did to deal with the recession, and what they intend to do to grow despite it, after it, or if the market stays at its current level of depressed activity. Like Lincoln says, we need to know where we’ve been and where we are in order to figure out what to do about our future. Part of assessing where we are involves looking at how we have been thinking about our businesses in terms of growth and improving productivity.

Think of yourself as a surfer that has encountered less than optimal surfing conditions on his favorite beach for an extended period of time. The waves are just not what they used to be. Then ask the question:

What Kind of Surfer Are You?
One that waits for the surf to come up again?

Or one that researches more beaches and travels to them?

The ’60s produced a cult movie called “The Endless Summer,” the story of two young surfers who wanted to follow the surfing season around the globe rather than be held hostage to winter weather or calm seas. To do this, they also had to learn to research and identify more great beaches, and become efficient and frugal travelers as well. They enlisted the services of a great travel agent for the latter.

So what does that mean for a distributor? You have to grow on more fronts, while improving your operational productivity in order to avoid wasting your efforts and increasing gross profit dollars, without taking advantage of larger scale of operations. It would be a shame to grow sales, total gross profits and the size of your operations without increasing your productivity. Why? With greater volume in a territory, you have the opportunity to leverage that with more productive operations. When you grow, you should be increasing the rate of profitability! Each day you let that opportunity pass, potential profits are wasted. The opportunity to create wealth has been lost in that case.

We’ll be talking more about that in a series of articles after we have a chance to assess the results of a survey that you’re invited to complete. To access the survey, click here.

Why should you respond to the survey? Like Lincoln said, you have to know where you are, and probably how you got there, to really assess how you and your industry colleagues have been thinking. Only then can you change your thinking to tackle the challenges of the future, which doesn’t appear that it will rebound like it did in the last two business cycles.

Here are the general topics we’ll be asking about:

• How did distributors’ sales, gross profits and net profits fare during this downturn?
• What happened to inventory turns and collections?
• What did distributors do in response to the downturn? How did these things work?
• What did they see manufacturers do? Where did they cut back?
• What would distributors have done differently in hindsight if they had known how deep the recession was going to be?
• Looking forward, which growth strategies are easier, which are harder? We’ll be prompting distributors with a number of different growth strategies to assess their responses).
• What do distributors struggle with in order to grow? Capital? Planning? Getting the right people? Launching more than one growth initiative at a time?
• How confident are distributors about the prospects for the economy, the direction of the nation, the prospects for inflation and their specific industry?
• When do distributors see the market coming back, and by how much?
• Where do distributors see growth coming from in the future?

Some Things We Know Already
Most economists don’t see us returning to robust growth any time soon. Most see flat to very modest growth from where we are now. Most distributors have shrunk an average of 20% or more. So, if you have plans to get back to where you were, or better, doing exactly the same things as yesterday, you can forget it without embracing different ways to grow and different directions for growth. So, what do you do? How can you grow facing this sobering reality?

Following are some different ways of thinking about your business. We’ll expand on these ideas in articles planned for future issues of Industrial Supply magazine.

You need to find new ways to grow and do it more profitably, which means your productivity needs to increase as well. You also need to grow on more than one front, so you are not dependent on one thing for your survival and profitability.

First, The Basic Growth Strategies
You should execute these in the order in which they appear. We will also be explaining more about how to execute these in the three articles that will appear in this magazine in future months.

1) Protect your core business at existing customers

2) Get more business from existing customers

3) Get business from competitors’ customers

4) Position in segments that will grow faster

5) Move into “adjacent” markets

a. Market new products to the same kinds of customers

b. Market the same products to new types of customers

c. Expand into new geographies

d. Use different channels to market

e. Offer different services

f. Integrate forward or backward in the channel

g. Change your business model: different store format, go direct to market, eliminate inventory, etc.

Productivity: A Fundamental View

To drive profitable growth, you need to think about productivity in terms of output for the inputs you invest. We like to put this in dollar terms, and get it down to the smallest unit of work that is strategic to the business. Split your thinking about productivity to front room (sales and marketing, and the customer) and back room (warehouse and accounting operations). A distributor does two basic things. One is for the customer (ship line items), and the other is for profit (make gross margin). It makes sense, then, that your top measurements should focus on these:

1) Front room productivity: Gross profit productivity

a. Execute more intelligent pricing

b. Drive broader product mix per customer

c. Measure gross profit per order compared to fixed costs to service the order

d. Measure ratio of gross margin dollars to expense dollars by salesperson

2) Back room productivity: Cost per line item delivered (back room)

a. Automate work processes as much as possible in the warehouse, delivery and accounting operations

b. Engineer more efficient work processes

c. Implement EDI and other eBusiness practices

Almost all your other measurements should feed into these top two.

What Will You Get After Taking The Survey?
After you take the survey, we’ll compile the results, interpret what people did and the problems they had executing the growth strategies we previously listed. If you supply your e-mail address, we will send a link to view the complete published results. We’ll also be sharing our views on growth and productivity strategies in three articles in the upcoming issues of this magazine.

Why Are We Doing This?
To be honest, we like independent businesspeople. We like your desire to make it as an independent business. We want to understand everything you have been doing and what you struggle with. We would also like you to understand those things too. Then we can recommend some different ways of looking at your business and, if you’re game, getting back on a growth path that makes you independent of whether the “surf” is up on one beach or not.

That’s how we can help. It’s that simple.

Neil Gillespie is a principal of Shamrock Growth Associates, Knoxville, Tenn. He has extensive experience with both manufacturers and distributors in his 31-year career. Neil’s practice focuses on helping independent and family businesses grow their business and improve profitability.

Allen Ray is an accomplished author, speaker, business advisor and distribution researcher. Allen has 45 years experience as a distribution business owner, marketer of information systems and product data and as a consultant to a range of vertical distribution channels dealing with varying economic scenarios. He is the principal of Allen Ray Associates, Dallas, Texas.

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

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