We can survive this economic turmoil

BY RICH SCHMITT
Management specialist

Welcome to 2009! There are lots of adjectives being used to describe the 2009 outlook but few, if any, are positive. Yet as I write this, I am still optimistic about the future of our economy and our industry. Like many others, I am not exactly sure when that improved future will happen. So I have a few more suggestions regarding operation in a struggling economy. I know I've covered this topic before, but the economy is still down and many predictions of the recovery seem to be retreating. By that I mean, the forecast timeframe of the recovery seems to be getting further away not closer.

I don't want to perpetuate the negative press that the news media continues to generate in our country. While there certainly are real problems, many businesses are still fundamentally sound and are being caught in the economic whirlpool effect. I heard one company's stock was getting hammered as they announced that their profits would be down to only a couple billion dollars. Sure, that was down from their peak but a couple years ago that level of profit would have been cause for celebration. (As always, I include the disclaimer that I am not an economist and don't have a crystal ball. You must create your own view of the future as you determine any activities your company will implement while it weathers the downturn.) But if you agree that the recovery is getting pushed back, it means that more must be done now.

My "top 5" list for your consideration

Right-size your organization -- Get your company sized properly for level of business that you have now and if business erodes more, keep resizing. I had previously recommended that you recast your budget. Hopefully, you have done that and today's right-sizing activity will be an adjustment to that revised business plan. If you have not adjusted your plans, a significant and more difficult adjustment may be required immediately. I was talking with a client recently and he said,
"We're a $60-million wholesaler and pretty darn lean." I said, "In 2009 you might be a $50-million wholesaler and at that level of sales, you are pretty darn fat." As I said before, I don't know where the economy is going, but I don't think very many wholesalers will maintain their 2008 sales or grow in 2009.

You must, at least, consider what you will do if sales are off 10 or 15% from your 2008 numbers. Some companies are keeping a little fat so they can hit the ground running when the recovery starts. In other words, they have too many people right now but think they will be well-positioned after business picks up. This may be a flawed approach, especially, if the downturn continues for a long period. Carrying that extra weight can hurt you.

I remember reading a story about the pioneers crossing the country in wagons to get to a new home in the West. As they started the journey, their wagons were filled with every sort of possession that they might want in their new home. The list included formal clothing, personal items, photos, the family bible, furniture and even pianos. They didn't understand the magnitude of the journey that they faced. They acted as though they were moving across town!

The trails were littered with these possessions as people lightened their loads. Some of the families immediately understood how the extra load was consuming the energy of their horses and their families. They quickly dumped the extra weight to conserve their energy for the long trip. They knew that the possessions would mean little if they didn't survive the journey. Sadly, some of the greedier and dumber families actually picked up some of these discarded possessions adding to their load. In the process, they decreased their odds of surviving the trip. Others, determined to keep the possessions they had accumulated, allowed these belongings to consume their daily energy and any reserves that they might need as the journey continued. Some of this was blatant stubbornness and others just didn't understand how much the trip would demand. When some of these people reached the mountains, they had nothing left for the climb.

I know that I am starting to sound like a chapter out of "Little House on the Prairie" but take a hard look at the length of this journey we are all on and get the load leaned and adjusted right now before it consumes your energy and your reserves. I know this will be tough but earlier is better.

Watch the cash -- Keeping expenses tight is always prudent. You may need to tighten your budgets and credit policy more than ever before. Watch you're a/r like a hawk. Some of your oldest, best customers might be in trouble and, like a drowning person, can take you under as they fight for survival.

Keep selling -- I disagree with the idea that selling doesn't matter in a down economy. The thought is that, selling doesn't matter when nobody is buying. As I write this, people are still buying. In general, people are buying less but they are still buying. They may not be buying what you are selling and that is certainly a problem. The challenge is to be there and in the game when somebody does buy something. Stay close to your existing customers. Some of them have a keen sense of where to find work and will be evolving and adapting to stay afloat. If you stay close to them, you may learn where there is some business to be had.

You should also look for new types of customers and carefully consider new types of business. I say new types of customers and new types of business with the normal caution about anything that is "new." I have said before that new ventures involve higher risks and will involve paying your dues. So don't launch into any new areas without the proper level of caution and respect. Make sure that there are people who are still buying what you are going to be selling -- at prices that will allow you to make money

Keep getting better at what you do -- Ideally your people will be busy but when there is down time, make sure that your people are using it productively and to the company's benefit. It is normal to mope around thinking about the bad economy but that is not productive or good for morale. Keep people on track, doing what they can to operate efficiently now and preparing for the recovery. Some suggestions:

1. Your inventory people should be dusting off the manuals for your computer system and looking for features that they could be using to reduce your investment and improve your turns. Very few companies have fully configured and tuned their computer's inventory management tools. Getting your system tuned will help now and after the economy turns around. (Of course, any major inventory changes should take into consideration any covenants associated with your line of credit.)
2. Training should continue. I am not talking about the fancy, expensive, off-site boondoggle type training. I am talking about basic product, selling, supervisor training that you were too busy to do when business was crazy. Getting up to speed on your new products and how to sell them. (Some of your team could probably use a refresher on selling all of your products.) This investment helps your team to sell more effectively and to better support your customers.
3. Prepare for price challenges. One area that always helps is your continuing work to train your team to effectively deal with price challenges. You know that price objections happen many times every day. In many companies, the only response is to drop the price in huge chunks (5, 10 or 15%). Why not get your team ready to respond in a constructive way or at least try to give profits away in smaller amounts. For a reprint describing some different approaches to dealing with pricing objections, e-mail me at rich@go-spi.com.
4. Your product offering should be reviewed to determine whether you can properly stock, sell and support all the lines that have accumulated over the past years. Maybe you can focus on a dozen faucet lines instead of the 30 you list on your line card. Determine whether slow-moving lines just need more selling focus or if they should be pruned from your inventory. While I continue to believe you should provide one-stop-shop service to your customers, most wholesalers have lines that no longer make sense or that never made sense.
5. Start creating your plan for when the economy does get better. What are you going to do when the upturn starts? Where are you going to expand? What new markets will you attack? High-performance wholesalers are always planning their next expansion move. They keep it close to the vest but they are doing the research and planning well in advance of their actual expansion. Getting a jump on the recovery is a good way to take share from a hibernating competitor.

Spend more time on pricing -- I know I sound like a broken record and if this wasn't so important, it could have been tucked neatly into the above category. Thus far, I have not found a single wholesaler who spends enough time on pricing. I am including some very smart wholesalers who spend a lot of time managing their pricing in this assessment. When there was lots of business, the shear volume covered a lot of sins in the business including pricing neglect. Now every sale must produce the highest profits possible. Every time you sell a product at the wrong price, there are two typical outcomes:

1. You get the sale and leave money on the table. Bad for you because, in some of situations, you may end up selling below break even for the company. As product costs go down, you have lost the cost inflation effect that sweetened your profits over the last couple years. In fact, some wholesalers who carried excess high-cost inventory into the downturn are really feeling a margin crunch as costs and prices drop.
2. You don't get the sale and, in the process, create a negative price-perception with your customers. I think that creating a poor perception of your competitiveness can sometimes be worse than losing a single sale. Being perceived as a "high-price wholesaler" is especially bad in the current economy.

There just isn't enough business out there that you can continue the pin-the-tail-on-the-donkey style of groping for the right price in your market. It is critically important that your pricing be right when an opportunity does present itself. The only way to get your pricing right is to devote the time and energy to understanding your market and managing your prices to that market.

I think 2009 will be a challenge for most businesses. The best businesses will stay fit in the downturn while getting in shape for the better economy that always follows.