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And then the winter came

by Frank Hurtte

It’s autumn, the weather is still sunny and bright, yet we don’t need Poor Richard’s Almanac to tell us change is around the corner. Similarly, we have been enjoying one of the greatest economic upturns in memory. Economy-wise, it’s sunny and bright. Unlike seasonal changes, where the calendar lets us know a cold spell is around the corner, economic cycles are more difficult to predict.

Some of the best economists, guys like the Beaulieu brothers from ITR Economics, are predicting a downturn. What’s more, unlike the TV meteorologist who accurately predicts tomorrow’s weather but hits somewhere in the high 60 percent range for the next five days, these guys make their call years out. They are calling for 2019 to be “mostly cloudy with a high chance of rain.” We’re not talking hurricane but we are talking a change.

If the economy slows, will you continue to drive forward without adjustment? If so, what do you see as the impact on important points like people, technology investments, expansion and profitability? I believe it makes sense to think about the ramifications an economic turn might have on our businesses. So, with these thoughts in mind, join me as we look at things you should be considering, just in case the economists are right.

Could you have grown sloppy on your expenses?
Let’s face it, a strong and steady flow of new orders has a tendency to build complacence. If you work on a real live operating budget, it’s pretty easy to justify an overage here, there and maybe even everywhere. If you happen to be one of the many distributors that for one reason or another decided to forgo establishing a detailed budget, two points come to mind. You need one. If the economy turns nasty you will need a budget all the more. Now is the time to begin thinking about an orderly review of your expenditures.

To give you an idea of how things can get out of hand, allow me to share a story. We worked with a distributor that brought in lunch on the day of their monthly sales meeting. It was a great idea. The pizza guy brought in a half-dozen pizzas and the entire team got a chance to hang out over lunch and build camaraderie. Along the way, someone complained they were sick of pizza so the menu shifted to a local sandwich place. But the migration wasn’t complete. Fast forward a few years and lunch was being catered by a high-end restaurant. Instead of spending an extra hundred bucks, these meals started to run up into the $600 range. Nobody noticed, until the business took a downturn.

The point of the story is simple. The distributor would have never sat down and budgeted three grand for a routine sales meeting. It just happened. Before you tar and feather me, I’m not against showing employee appreciation. I am against unplanned and creeping expenses.

Other examples of out-of-control expenses come via anything that auto renews. This can be software licenses, professional organizations, lawn care, exterminators and even coffee services. We worked with one organization that discovered it had paid $150 a month for a bulk email service that hadn’t been used for over four years. Yep, it auto renewed. It wasn’t big money but once they started looking, they found a half-dozen other unused subscriptions. As Illinois Senator Evert Dirksen used to say, “A billion here and a billion there and before you know it we’re talking serious money.”

Do you know your break even number?
Simply stated, what is the amount of gross margin you need to break even for the month? I believe controlling expenses involves the goal of making money. Why is this important? Avoiding digging a financial hole during a recession provides you with the ongoing track record to get more attractive financing, which allows for a faster comeback following the economic downturn.

While some expenses cannot be avoided, others can be deferred. Thinking about things like office equipment purchases, discretionary building updates, advertising and promotional items (trash and trinkets), even company events can sometimes be shuffled to another month for the sake of not writing red ink.

Extending past just delaying purchases, it may be possible to arrange for prepayment on some items you purchase. This allows you to take advantage of good times today and still have the stuff you deem necessary for the future.

Are there people who need a tune up or tune out?
Straight from the office of yet another distributor leader, we hear, “We don’t like Bob’s work or his attitude but, for now, we are too busy to do without him or train another person.” Besides covering issues with finances, good economies provide a smoke screen for less than stellar employees.

Many companies wait until the throes of a poor economy before they begin trying to determine which employees are “top notch” versus the “warm bodies.” The process works in good times and bad times, but knowing ahead of the downturn makes great sense.

I recommend serious evaluations of your entire staff. You must create subjective, unvarnished ratings, from top performer to the guy at the very bottom of the performance chart. It’s not fun, but understanding exactly who will never be anything north of a ‘C’ contributor is a strategic skill. On this topic, I recommend releasing the poor performers today, while the economy is good. It’s more humane to release a person while the economy still holds opportunity for them to get a job.

Take a critical look at your inventory
Don’t wait for the recession to hit before reviewing your inventory. Think about it, for the past several years, customers, suppliers and salespeople have made a beeline to your office with new inventory requests. Most of it sold, but a few items didn’t. Because business has been brisk, taking care of this issue may have been pushed to the bottom of the priority list. You need to change that situation.

If an SKU hasn’t been sold for 180 days, how likely is it to be sold next week? If a part has lazed around your backroom without being sold for a year, do we really need it? Not only is this stuff clogging your shelves, but it’s consuming dollars.

There’s a better chance of getting one of your supply partners to take it back now, before a slowdown starts. For the good ones with a stock rotation program built into their distribution policy, take advantage of it. If the parts aren’t covered by the general program, negotiate something; even if it requires a restocking fee. If the inventory isn’t returnable, sell it at a discount or take a write-off today while the economy is still good.

Some surplus inventory blame lays with customers. Many of us offer supply contracts that require us to hold emergency inventory for customers. These plans make great sense for both customer and distributor. Generally, the customer commits to purchasing a certain volume of the product and their friendly neighborhood distributor holds more inventory than normally justified as a service to the customer. Often, the customer commits to purchasing the product should it languish in stock without a sale for 12 to 18 months. There are two problems here. First, sometimes salespeople, in their zeal, neglect to ask the customer for a signed “closed end” agreement. If this is the case, it’s better to come to that realization now rather than later. Secondly, customers forget the commitment. In either case, you will get a better outcome now, instead of in the midst of a downturn.

Adjust prices while the sun still shines
Now is a great time to evaluate your prices. Based on all the TV talk about tariffs and trade wars, customers may even expect price adjustments. This is the time to review all SPAs and other special pricing arrangements with customers. Based on the fact that recessions impact customers, too, moving prices that border on low profitability now rather than later will position your organization for a potential recessionary time.

While on the topic of pricing and profitability, if you have not employed a solid pricing process, now is the time. Based on our research with dozens of distributors in the industrial space, companies with a pricing process create greater gross margin and bottom-line performance in recessions. David Bauders and his team at Strategic Pricing Associates have a track record (with over 500 distributors) of producing a typical margin bump of two full points. This bump in gross margin falls mostly to the bottom line and will serve you well as we head into the storm.

Rapid fire thoughts on recessions
There are more things to think about than space to cover, so let’s end this with a rapid fire list of points to remember.

• Technology is getting cheaper. The payback is shorter. In some instances, buying the right technology provides instant payback. Automated order entry, web stores and a few other things have come down in price.
• Recessions offer up great deals for distributors. Good people become more plentiful, equipment is cheaper to buy and some supply partners are put into the mood of building closer cooperation with the guys who continue to perform in tough times.
• Recessions have beginnings and endings. Experience dictates that companies gain market share during recessions. This is as much of an opportunity as it is a threat.

Before we go . . .
The experts are saying this recession will be short and small. Here’s the good news and bad news. The best-run distributors might see it as a small bump on the road of life. Most of these world-class companies have already instituted most, if not all, of these points. It’s not too late to make some minor corrections and implement your own set of plans. As for the bad news, a good many distributors will merely read this piece and never quite get around to making changes. That’s not good.

Straight talk, common sense and powerful interactions all describe Frank Hurtte. Frank speaks and consults on the new reality facing distribution. He has a new book out – “Plan on Breaking Through – Strategic Planning for Accounts.” Contact Frank at  frank@riverheightsconsulting.com, (563) 514-1104 or at riverheightsconsulting.com.

This article originally appeared in the Nov./Dec. 2018 issue of Industrial Supply magazine. Copyright 2018, Direct Business Media.

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