As we spend time together, it’s hard to believe 2018 is just a few short months away. It’s been an awesome summer. The weather has been great, the family vacation allowed some important bonding and, on the work side, business remained brisk. Most of our working hours have been a balance between summer activities and keeping the business running. Life is good.
Recalling a phrase from the best-seller Good to Great, it’s time to “Work on the business, not in the business.” There is still plenty of time to make a difference in 2017 and, better yet, position your company for the coming year. With that in mind, let’s toss out a few things that can impact your company. We’ve broken the list into two areas:
- Making more money in 2017.
- Positioning your company for a great 2018.
Make more money before 2018…Harvesting Co-op and program dollars
Many of our supply partners offer up funding that is designed to build both brand and dollars available to distributors, sometimes with strings attached, and other times with monetary rewards for the stuff you are already doing. Strangely, many distributors fail to maximize this source of revenue. The money (in the form of Co-op and program dollars) is there, but it’s not solidly on the radar screen of activities.
Because these funds fall somewhere between sales, operations and marketing, it’s not uncommon for no one person to be responsible for harvesting this money for the company. I specifically recommend that marketing oversee keeping track of the money.
On a related topic, our industry sometimes offers up preseason programs that allow purchasing to make special buys before the demand hits. Some of these are great deals, others are just mediocre and some are poorly planned distributor loading programs. Since we are approaching the beginning of a new season, now is a great time to sit down with your purchasing group to determine some rules for separating the great from the not-so-good plans. Ideally, these would involve a percentage of discount versus current cost of money, inventory turns and selling advantage.
Clean up customer returns
Next, let’s take a little trip out to the warehouse. Somewhere in a seldom seen back corner, there is a section marked, “customer returns.” To most, this looks like a pile of beat-up boxes with scratched and dented products. But to your company, it’s a dusty stack of dollars.
Looking back, the warehouse has been busy. It’s been a hot summer. Sometimes short staffed, the team has been humping to get emergency orders received and out the door. The sales team has been taking care of business, authorizing returns from job sites, service trucks and dealer locations. Because many manufacturers will drag their feet on issuing credit near their year-end (whether calendar or fiscal), this is the time to clean up the returns.
Getting your inventory in line
Continuing on the topic of returns, what about stock rotation? I challenge distributors everywhere to do a review of their inventory with no turns in the past 180 days. If you haven’t sold a product in the last six months, what are the realistic chances of selling it? Now is a great time to make those adjustments; out with the nonmoving and in with the product that can make you money. And, in case you are wondering, a restocking charge today is better than an outright write-off later.
Clean up special pricing agreements
Special pricing agreements have become a fixture in many industries. Here’s how they work. The manufacturer authorizes a special deep discount for products sold to a specific customer. Typically, they have a start and end date. Each year, the manufacturer raises the price, and often the distributor neglects to adjust the price to the customer promptly. The net result is an unnecessary margin drop. But there is a better way.
I recommend distributors assign someone to provide salespeople with 45-day notices, which state when the special pricing agreements end. It is the salesperson’s charge to alert customers that the agreement is ending and there is a new special price. This salesperson must “take one for the home team.” For example, a 2 percent price increase to you from the manufacturer becomes a 3 percent price increase for the customer. Enhanced margins add directly to the bottom line, this year and into the future.
Pricing processes improve the bottom line
Sticking to the topic of pricing and margins, my friend David Bauders of Strategic Pricing Associates has a sophisticated pricing process that typically improves a distributor’s overall margin by two points. I have interviewed more than 25 distributors in the HVACR industry who validate his claims. Even more importantly, Strategic Pricing Associates advertises an implementation plan that produces results in 90 days, which could have an impact on your business this year.
Position your company for a great 2018
Let’s set our focus out a few more months. Instead of instant gratification, we’ll explore a couple of topics that will help set your sails for a more prosperous 2018 and beyond.
Working your budget/plan
Do you regularly review your operating budget and plan against year-to-date results? Now is the right time to invest an hour toward adjusting your plan. Many skip over the details and compare only gross margin and net profits, but I recommend going deeper. Understanding a few of the details goes a long way to building better processes and strengthening your position.
Are there numbers that you should expand or contract based on current conditions? For instance, comparing marketing expenses against plan might point to a lack of proactive outreach to your customer base. Additional dollars spent for technology may indicate major computer upgrades that were unexpected at the beginning of the year. Delivery costs running outside of budgeted numbers may denote a need for adding a greater surcharge to your UPS billing system.
If your company is one of the many that does not create an annual operating budget, reviewing current expenses now versus last year's expenses is a good start to creating an annual planning budget that can be used to better direct your organization in 2018 and beyond.
Benchmark yourself against others
One of the first tools I ask for when meeting a first-time client are the benchmarking reports published by HARDI. Financials provide distributor managers with a picture of their business. For all but the accounting types, benchmarking reports can become boring and burdensome — a lengthy page full of numbers. But, when combined with comparisons of others in the industry, they take on new life.
The report compares your organization against other companies of similar market focus and size. Seeing your numbers side by side with upper quartile high-performance distributors adds a perspective that simply staring at a long spreadsheet does not. Look for areas where others outperformed your company and ask yourself how you might change things to get closer to their results. And, in the few areas where you outdid the other guys, enjoy a big gulp of coffee and move ahead. Unfortunately, for many organizations, this is a once-a-year exercise conducted by the CFO and president. That’s a mistake.
Progressive distributors have discovered the power of continuously contrasting their performance against that of others. To give you a better idea of how this works, here are a few comparisons others have found valuable in their operations:
The ratio of employee costs to gross margin. When times are good, it is easy to get overly aggressive in hiring new people instead of looking for productivity gains. Comparing your costs to industry averages gives new perspective;
Number of lines entered per inside sales person. Every inside sales department will tell you they are busy. The question is how efficient are they. Here technology is making major strides. For example, Conexiom has developed a cloud-based system for changing incoming orders via fax or email attachment into orders on the system with 100 percent accuracy and zero keystrokes. We will see continued improvement for distributors in this arena;
A/R days outstanding. Accelerating payments from customers improves distributor profitability, and according to experts, provides insight into your quality of shipping, invoicing and other back office tasks. Reviewing and improving this number opens the door to future success; and
Current inventory on hand. Inventory levels have a way of creeping in an upward direction; salespeople request new adds without getting a real commitment from customers, supply partners push for stock on new products, and volume buys entice your company to expand coverage. It’s easy to bring stock levels up and hard to drive them down. Providing the leadership team with a regular look at things such as dollar value, turns and GMROI keeps everyone moving in the right direction.
A closing thought...good times are the best time to re−engineer
Good times are the best time to re-engineer portions of your business. Every distributor claims its goal is improved productivity — to do 50 percent more business with 20 percent more people. Looking back, most miss the mark. I believe we can tie this phenomenon to poor planning and the cyclical nature of our business. When times are good, instead of finding and driving implementation of better processes and technology tools, we put out fires by adding more people. Every time this happens, we give away the opportunity for real competitive advantage.
If you are interested in re-engineering your business, shoot me an email, and I will share my short list of areas that need exploring. DC