Every Silver Cloud Potentially has a Dark Lining - Things to Ponder During Good Years
Finally, and at long last, we are entering a time of high growth. This information comes not just from anecdotal reports from distributors across the country but also from some pretty respected economists. While speaking to the National Association of Wholesale/Distributors Executive Summit, economist Alan Beaulieu of ITR Economics confirmed much of what distributors were noticing in their local territories: business is expanding.
According to Beaulieu, the U.S. economy is poised to grow 3.7 percent in 2017, and that rate will extend into the first half of 2018. Beaulieu said, “We’re going to experience some good times ahead. There are many signs for optimism, including favorable interest rates, nonresidential construction improving, the rise of employment and wages and banks’ willingness to lend money.” This is some pretty cool stuff for distributors.
But Every Silver Cloud has a Dark Lining
Not to be a perennial bummer, but all this growth presents a few issues for distributors. Let’s explore issues tied to moving forward during good economic times. Let’s explore the dark lining in what most view as a silver cloud.
First, great economies can hamper real growth. What does this mean? Most distributors and their supply partners are shooting for not only top-line growth, but for market share expansion. Wade Boelter, vice president and general manager of Minnesota Air, sums this up nicely: “I am always just a bit gun shy going into a rapid growth economy. It can serve to disguise the real picture. Minnesota Air is dedicated to growing our share. When times are tough, we can surmise even modest growth is an improvement in our share numbers and a move in that direction. When times are great, we can’t rest on our laurels. Growth won’t drive itself. For us, there’s no resting during these up years. Our strategy has been to create a model designed to push for growth above and beyond the rising market tide. The good years require management’s constant attention.”
Great Economies Encourage us to Hire Rather than Innovate
Boelter’s comments bring us to one of the first dark linings wrapped by a silver cloud. As the economy grows, you can count on stress and strain in nearly every department. Sales growth equates to not only increased top line sales numbers, but a cornucopia of increased activities. Inside sales have more incoming orders, the warehouse receives and ships more and A/R processes more invoices. At first glance, everyone might require just one more body to keep the wheels on the wagon.
For department heads, first inclinations call for marching into the boss’ office and demanding more people. Investing in refining, streamlining or automating the current process is more difficult. And, when the coffers are full, it’s easy for the boss just to say “yes” and move on to the next pressing issue. Nevertheless, let’s look back …
For eons, the catchphrase among distributors has been, “growth without adding people.” Yet, after financial reviews of dozens of distributors, most are struggling to simply hold the profit and productivity line. A good many find themselves slipping in return on investment numbers. And this is after massive investments in “productivity enhancing” tools. From an outside perspective, payoffs tied to ERP systems, CRM packages and marketing tools have been somewhere between zero and nada. Why? Because most of the time, we simply plug the new tool into the old process.
Now is the time to challenge your team to develop plans for doing more work with fewer people. You can expect pushback, roadblocks and a thousand reasons why things have to be done the way they've always been done rather rather than innovative re-engineering.
In a recent conversation with ABR Wholesalers CEO Jody Monaco McGarry, we heard of an example of an innovative distributor actively re-engineering their team.
“In preparation for the future, we are looking toward the development of new muscle in our inside sales department," McGarry said. "For example, many of our contractors and dealers rely on us to handle project logistics. In the old days, this served as a time-consuming distraction to our outside sales team. The scope of this extends well past the normal process in inside sales, pushing into detailed scheduling and project management duties. The result will be more productivity in the sales group.”
Pushing even further, ABR and many other distributors are investing in new skills training for existing employees. Position training is a must to ensure each employee has the right skills to expand his or her personal productivity.
Good Economies Drive up People Costs
One byproduct of growth economies is an overall increased need for good people; the law of supply and demand kicks in. Since distributors are notorious for poaching employees rather than developing themselves, the prevailing wage goes up. Sales departments are heavily affected because commission-paid guys get a lift in compensation. Additionally, hiring someone during the upswing mostly sets a new base-line for future compensation.
Progressive distributors are bucking the poaching mentality. In addition to seeking talent outside of the HVAC industry, they invest in culture building and developing employees from the inside out. And, experience dictates employees value this approach because it sends a solid message: The company is concerned about them as individuals and is committed to their personal growth.
Wilmington, Massachusetts-based S.G. Torrice Co. is a great example of this new approach. “Providing consistent opportunities for employees to expand on their talents is at the core of our strategy," said Matt Bedard, CEO of the company. "It's not a one-size-fits-all approach. Instead, we insist our front-line managers continuously evaluate employee skills and work to place our folks into the position best matching their personal strengths. Extending beyond skills training, we work to reinforce the culture that makes our company special, things like respect and living a can-do attitude, attention to detail and a sense of urgency. We firmly believe that taking care of employees is a precursor to having a fabulous customer experience.”
I believe it is important to note that S. G. Torrice feels so deeply about the importance of culture and building employees that they have added a director of Employee Development to their team. This person not only develops a strategy for further culture growth, but he also holds managers responsible for constantly evaluating employees and helping them find the right position to grow. Needless to say, it’s all about productivity improvement and growing without an offsetting headcount growth.
Brisk Business Masks Process Breakdowns
Surging sales also provides stealth cover for many problems. You lose market share, but since the numbers are looking good, you don’t notice competitors poaching business from some of your accounts. Mediocre sellers post growth dollars, and their lack of skills go unnoticed. Sellers announce they are too busy for CRM data input. Warehouses get dirty, shelves get cluttered. Customer returns languish for months before suppliers are notified and credit received.
Even the accounting department contributes by allowing aging
A/Rs to creep to unprecedented highs. Costly errors take place with sloppy handling of manually handled ship and debit rebate programs. Credits are missed. Money slides out of the distributor’s grasp. I could go on, but you get the picture.
Here are a couple of recommendations. Document your processes now. No need for flowery wording, just put together an outline or a flowchart. Measure your compliance to the process. Review process improvement (as well as sales growth) during company meetings.
Following Bedard’s words, insist that front-line managers review their people and measure their performance. Set improvement plans with drop-dead dates for poorly performing employees. It’s easy to postpone handling their issues because you are busy, but attention to detail will put you in a better position when the economy softens.
Great Business Climates Distract from Strategic Thought
Without the right kind of discipline, distributor leaders find themselves consumed by urgent issues and procrastinate strategically critical issues. It feels good to be busy and even better when tying busy to the instant gratification of big business. But our world is changing … spinning faster than ever before. Investing in strategic issues during good times is more important during upticks in the economy. Experience dictates that those with solid strategy go into recession better positioned and rise faster with the next upturn. Let’s think of strategically important topics.
I believe a solid pricing process is an essential part of any strategic initiative. First, pricing process drives bottom-line results. The typical distributor using David Bauders’ Strategic Pricing Associates improves gross margin by two points. In some industries, this nearly doubles the bottom-line results. For most distributors, the gain is still in the 50 percent range. You can’t ignore this size of an increase.
It’s important to understand thatprocesses in the sales department tend to interact. Building a credible pricing process requires detailed customer and supplier segmentation; and marketing improves. Salespeople are forced to think more critically about the customers they invest time with. Targeting improves. And sales teams with well-developed targets are 47 percent more effective in reaching their goals.
Developing a strategy for e-commerce and internet-based sales tools should be part of your strategy. Rather than taking the Amazon-clone approach, we should look at technologies that allow your business to be more efficient, more effective and sometimes automated. Al Bates of the Profit Planning Group shared an important point: “More than a third of a distributor’s customers are costing you 45 percent of your profit.” That means you already have a lot of customers who cost you money to do business with. And, in my opinion, the number is growing. What is your plan?
One solution would be to take advantage of new technologies capable of automating the process of entering customer purchase orders. A couple of my clients are using it and report a massive increase in customer service-related productivity. Another solution is eliminating outside sales contacts with customers by providing a web-portal that allows small (and most likely unprofitable) customers to serve themselves.
A final thought
We need to celebrate the good times, and but even more importantly, we need to position for future business cycles. I have observed an interesting phenomenon. Distributors tend to gain market share growth when they drive hard during the upcycle and accelerate out of the down times. I believe analytics coupled with disciplined execution will be the key to the future. And I have a list of analytics every distributor should be using by the next downturn. It’s yours for the asking.