Strategizing for beating the economic downturn

BY RICH SCHMITT

Management specialist

I was talking to a wholesaler several years ago, during the last downturn, about a group of changes that he needed to make. The changes included tough actions involving his team, his vendors and several locations. I told him that these changes needed to be completed with some urgency. He had allowed the situation to become urgent because he had postponed any changes hoping that the situation would magically resolve itself. The economy had continued down and the situation had gotten worse and thus even more critical.

After hearing the difficult and depressing actions on my list he said, “I don’t think I would want to come to work after I did all these distasteful things.” I told him that if he didn’t do these things, the new owner wouldn’t be asking him to come in at all. The new owner would probably be his major supplier since he owed them a significant amount of money. I felt sure that they would be making substantial changes in a much less intelligent and less humane way than he would. He got the message. He quickly made a bunch of the changes, survived the crisis and ended up with a smaller but fundamentally sound and stronger business. And in the end, coming to work was more fun since the company was making money.

As you look at your business’ performance and prepare for the remainder of 2008, here are several thoughts for you:

• Reforecast your year immediately -- Many of you have obsolete plans and budgets. They were completed months ago and did not have the benefit of your latest data and insights regarding the state of your business and the markets you serve. For many wholesalers, their 2008 forecast has eroded though they have not yet acknowledged their situation. For some wholesalers, the future will be a flaming train-wreck if they don’t act immediately. Your new forecast will give you greater clarity as you decide whether to and how much to adjust the business. Plus it will give you and your some team comfort knowing that you are taking control of your situation rather than just hoping for the best. As you create your new revenue forecast be sure to take into account potential decreases in gross margin percentages that are occurring in some markets. In the end, it is gross margin that dictates how much you have available to spend.
• Recast your expense budget using your new forecast -- Continuing to spend to your old budget is insanity when you know that your expected revenue and gross margin will not support that expense budget. Most companies tend to cut expenses behind their eroding gross margin forecast. That means that gross margin is declining faster than they are cutting expenses. If you have deep, deep pockets and want to throw away some of your spare cash, this might work but is certainly not recommended. 

I think all expenses should be re-evaluated. I hear the excuse, “Well we are a third of the way into this project so we’re committed to complete it.” Completing a project that you cannot fund is just wrong. When you are going in the wrong direction or doing the wrong things it is almost never too late to stop. As the old line goes, “When you find that you are digging yourself into a hole, the first thing to do is: Stop digging.” In some cases, penalties may be involved but you might determine that those penalties are a better alternative than taking a now-flawed project to completion. I once observed a company complete a lavish office upgrade for the executives while they were laying people off. The excuse was that they were half-way done when the downturn hit. The actual expense was minor compared to the morale impact in the company. The “reduced” team felt they were being asked to work harder so the execs could have better offices.

• Act quickly -- Procrastination is deadly when your expenses and gross margin generation are not linked. Said another way, when you are bleeding, you must act immediately to stop the hemorrhaging.
• Act sooner not later -- When you delay the process of correcting the problems in your plans, you increase the size and urgency of any changes you will have to make later. What might be a minor course correction now will be a crash avoidance maneuver in six months. The value of acting sooner is that a change you make today will produce eight months of benefit. If you make the same change in six months you will see only two months of benefit. In some companies, cutting one person now might save enough money to hit the year’s profit plan. Waiting until August might mean than two people need to be cut to achieve the same performance.
• Attack problems directly -- Create swat teams to address problem areas quickly and aggressively. This is no time for a six-week study by a committee followed by a weak or politically diluted response.  This is a one-, two- or three-person team that studies a problem, prepares a plan of attack, gets approval and then drives forward. 
• Cut enough when you do make cuts -- Any cuts can be demoralizing to your team. But making three little cuts is like pulling a bandage off in the most painful and agonizing fashion. If you must cut budgets or staff, try to get it over and done so you and your team can get back to work serving customers and beating the competition. 
• When making personnel cuts, act with sensitivity -- The people who are being let go, should always be treated with respect for three reasons: 1) In many states, it is the law; 2) It is the right thing to do; and 3) The remaining team is watching very carefully because they want to determine how they will be treated when the chips are down. People know that tough actions must be taken and when done fairly, with respect and compassionately, they will probably understand. When the cuts are done with brutality or with favoritism, you destroy the remaining team’s morale and their desire to be part of the solution going forward.
• Communicate often and personally with your team -- Your team is concerned about their future. They like the company and like you, but at the end of the day, they are worried about their situation and their family. Housing is off, the economy is down and our industry has been traditionally impacted by these factors. This concern can lead to reduced focus, poor moral and can actually create customer service problems that amplify your problems. Sending out a memo does not have the same impact as meeting with the team face-to-face. Remember that they want to have confidence in their captain, they want to know that there is a plan to weather this storm and they want to know what their role is in the plan so they can contribute to the company’s success. Always review the situation with your labor attorney and get their advice on any personnel announcements. (As an aside, never make light of the situation. I have had people relate stories where the boss tried to “lighten up” the situation by saying, “Now that we’re done with the personnel reductions, there is some good news, I saved a lot of money on my car insurance.” It is disrespectful and just not funny.)
• Communicate with your customers -- As I talk with the wholesalers at industry meetings, there are companies that are holding their own and some that even say they are growing. One of the common threads among these companies is that they are maintaining and even increasing their customer contact. One owner said, “Some of our competitors are in reverse. They are cutting back services, people and inventory. We, on the other hand, are working to keep every customer-touch activity seem the same or better to our customers. The company has made significant cuts but the customers continue to see the same faces every day. Further, we try to be up-beat and positive as we talk about the changes in the market and the changes we have been forced to make. We don’t make light of the situation because many of our customers are really struggling but they don’t want to come in and hear gloom and doom from us. We think our approach is gaining us market share.” 
• Communicate with and partner with your suppliers -- Many of you will find that your suppliers are struggling, too, and want to work with you to move product. Where some suppliers were once less cooperative and, sometimes even arrogant, they seem more interested in partnering to work through this downturn with their wholesaler partners. So talk to your suppliers to ask what they can do to help. At the very least, you must insure that you are getting the same help that your competitors are getting from the same or from competing suppliers.
• Communicate with your banker --Banks are under pressure these days to tighten up their act with regard to borrowing. Money seems tighter but most banks still have money to lend to good businesses. Also remember that most banks do not understand wholesale distribution so you must acquaint or reacquaint them with your business. Typically they want to understand your receivables and your inventory. If they are like most bankers, they understand hard-goods receivables but they do not understand hard-goods inventory. Unlike many industries that they work with, your inventory is pretty stable product. Your copper fittings don’t have an expiration date and they don’t go out of style. So a six-month-old copper fitting is a lot different than a six-month-old dress or six-month-old jug of milk but your banker may not really understand the situation. (Fittings are, of course, subject to metal price fluctuations.) Many wholesalers have a pretty good picture to present to their banker but don’t take the time to make the call. When your banker doesn’t understand your business it can mean that they will not give you their most favorable interest rate or that you cannot borrow the amount you need to operate the business.
• Set an example for the team and ask them to do more with less -- When the going gets tough, your team is watching what you do. Tell them what you are doing personally to contribute to the solution and ask them to kick it up a notch and do more as a part of your revised plan.
• Get your pricing set properly -- I know you’re probably tired of pricing, but I just know that very few wholesalers are properly and fully managing their pricing. That means there is still an opportunity to improve performance by really managing and controlling your pricing in these tough times.
  
  

Upturns and downturns have been and will always be a part of our life in this industry. We have said for years that the best wholesalers make money during the downturns and make a bunch of money in the upturns. So get your company trimmed up for the coming year, get your team energized and when your competition hides in a bunker, go out and take some of their market share. 

For additional suggestions about performance improvement, e-mail me at rich@go-spi.com