The Plan for 2010
Scarcity vs. Plenty; Execution vs. Planning; Cash Flow vs. Growth
by Brent Grover
In his play Anthony and Cleopatra, 1606, Shakespeare put the following words in Cleopatra’s mouth: “My salad days, when I was green in judgment; cold in blood . . .”
The Bard of Avon was referring, of course, to that youthful and carefree time of pleasure and innocence. Those green salad days are as fleeting as the green leaves of a delectable Caesar salad. The “what fools men are in their salad days” quote is from an 1862 Oregon newspaper, by the way.
Were the years 2004-2007 the “salad days” for most wholesale distributors? Remember what immediately preceded those years: the “irrational exuberance” of the tech bubble and its burst, the economic despair following 9/11? The ships in the distribution navy then rode the crest of a huge tidal wave: low interest rates, rapid expansion, China, rising commodities markets, private equity buyouts, easy money.
Many wholesale distributor executives misunderstood the root causes of, or at least misinterpreted the transient nature of, the expansion of 2004-2007. Those indeed were the salad days for many distributors, but like the green days of youth they were destined to morph into another phase of the economic cycle. Sad to say that some distribution leaders did act like fools in their salad days.
I offer three themes for your 2010 planning mode: scarcity vs. plenty; execution vs. planning; cash flow vs. growth.
Theme No. 1: Scarcity vs. Plenty
Even the government of the golden state of California, the eighth largest economy in the world (if California were a country its economy would be the size of France), is in the mode of scarcity vs. plenty. Our salad days were a time of plenty; 2010 is a time of scarcity.
- Scarce resources does not mean failing to invest in promising strategic opportunities.
- Scarce resources means not investing in anything that is not a promising strategic opportunity.
Theme No. 2: Execution vs. Planning
One of the good business books that came out this year (in addition to my new book, “Strategic Pricing for Distributors,” which I shamelessly plug and suggest that you order from www.nawpubs.org) is called “The Execution Premium” by Robert Kaplan and David Norton. The authors emphasize that too many companies create strong plans but fail in the execution phase. Evergreen Consulting LLC has facilitated strategic plans for many distributors and we strongly agree with Kaplan and Norton.
One of my favorite planning quotes is from General George Patton: “A good plan violently executed now is better than a perfect plan executed next week.” Left on their own, many management teams get wrapped up in the day-to-day at their desks and don’t execute their plans well.
- Strong execution, even violent execution, doesn’t mean not having a plan.
- Emphasis on execution means keeping the plan simple but making sure the goals are achieved.
Theme No. 3: Cash Flow vs. Growth
We spent lots of time this year with wholesale distributors and their banks. Most of those meetings were conducted on the lower floors of the banks, in rooms with tile floors where we drank cold coffee from foam cups. The high-level vistas, mahogany conference tables, plush carpets and steaming coffee in china cups were no longer for us. For a much better description, read about Charlie Croker in Tom Wolfe’s “A Man in Full.”
During the salad days, banks completed the transition of many of their wholesale distributor borrower-customers from cash flow lending to asset-based financing. What this means is that we pledged our prime collateral – the receivables and inventories comprise 80%-plus of our assets – to secure our bank loans. When sales volume goes into the tank, bad things happen: our asset borrowing base shrinks as receivables and inventory contract, so our credit line shrinks, too. Our free cash flow, cash available to pay interest and pay down bank debt, drops off as profits evaporate. The profit squeeze can trip our loan covenants and result in painful penalties, higher interest rates and those banker meetings with cold coffee in foam cups.
- Cash flow obsession does not mean ignoring allgrowth opportunities.
- Focus on cash flow means investing our precious cash only in good growth: new business with potential for strong, ongoing profit contributions.
We suggest that you consider these three themes when crafting your plans for 2010. Some economists are already seeing some sprouts – early indicators of the economy’s recovery – that may cause premature celebrations in certain quarters. Nay, let’s stay the course. We may not be out of the woods yet, and there appears to be plenty of time for us to restock the shelves in the warehouse and strain our balance sheets with shiny new trucks.
There will be salad days again. Make those strategic investments in people, systems and profitable growth. Keep some dry powder on hand – for acquisitive distributors who want to jump start their growth, there may be some pretty nifty buying opportunities to pursue in 2010 and 2011.
Brent Grover has written five books for the NAW Institute for Distribution Excellence and numerous articles about distribution management. He is a regular contributor to Industrial Supply magazine. Reach him at (216) 360-4600 ext.101 or brent@evergreen-consulting.com.
This article originally appeared in the Nov./Dec. 2009 edition of Industrial Supply magazine. Copyright 2009, Direct Business Media, LLC.
INDUSTRIAL SUPPLY MAGAZINE
The November/December issue of Industrial Supply magazine features an in-depth cover story about Kimball Midwest. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and Mike Marks, as well as interviews with numerous product and distribution industry experts.
