You can observe a lot by watching

BY RICH SCHMITT
Management specialist

As some of you may know, I am a long-time fan of Yogi Berra. I must admit that it started when I was very young and, frankly, I confused him with the cartoon character Yogi Bear. Even after I got older and decided that I was a Pirates fan, I still liked Yogi for his passion, his sense of humor and his simple wisdom. So I start this column with another Yogi quote — from the ballplayer not the bear. (I reserve the right to quote the bear in future columns, especially since I understand that both Yogi and BooBoo have agreed to do a 3D biopic of their lives…some actors never forget their humble roots.)

According to Yogi, “You can observe a lot by watching.” I think he is right and if we all follow his suggestion, we can improve many facets of our business and personal lives. I want to start the year with a list of things I have observed in our industry or have learned from many generous people who have shared their wisdom and observations with me. I will state up front that there is little science but much common sense behind these observations.

Over time, owners and management often lose touch

• They probably walk past or are confronted with many of the company’s problems and opportunities every day. We all are. They have just become numbed or tune out the problems and opportunities as they rush from fire to fire. Unfortunately, they sometimes rush past the gasoline that is making the fires burn so hot.

• Their perception of customers and competitors comes from sales reports and second- or third-hand customer contacts or from fictional stories about competitors as told by the sales team.

• Some of the next generation have been shielded from the business as they grew up and are now more interested in the executive title than in the actual hard work that goes with the title. (I know that many of the next generation are getting a tough introduction to the business in this economy and are working their tail off. My hat is off to them.)

• Prescription:

1. Get tuned-in to your business – Take some time to “observe a lot.” Walk through each location slowly and take notes about what you see — the good, bad and ugly.

2. And then take the time to act on those observations. For a reprint on things to observe during your walk e-mail me at rich@go-spi.com.

3. Walk through every area of your business looking at it as a customer does. How does it stack up against your competition and does it fit your vision of how it should look and operate?

4. On another occasion, walk through every area of your business looking at it as an employee does. How does it stack up to your vision of how it should look and operate?

5. Ask yourself, “Do our people operate as a team or like a group of free-lance free-agents?” If your company is tending toward free-lance free-agents, you might want to consider:

a. Sometimes they act this way because there are no procedures.

b. Sometimes it is because you reward the renegades and not the reliable.

c. Sometimes your procedures are stupid and they ignore them — not in protest but because they care.

d. Sometimes people resent authority or any attempt to limit their individuality. (In a past life, I had an employee suggest that it was unethical for the company to inhibit her from doing her very best work for a customer. I suggested that the customer was operating with a budget and only willing to pay for her “good” work. However, the customer was willing to accept her personal donation of time to the project. She declined.)

e. Sometimes team members start to believe they are like ______. (Fill in the blank with your favorite NFL, NBA or MLB prima donna diva who thinks he is the team and not just a member of the team.) Often you can get these people to rejoin your team. When you cannot make progress, unlike professional sports where the number of players on the field/court is limited, you are allowed to, at your convenience, replace the diva with two pretty good players and endure a lot less trauma.

Whatever the cause, the situation must be remedied because great teams sing from the same sheet of music and work toward common objects. Great companies build processes and procedures that are based upon best practices.

• After they are in place, everybody does these activities the company way. If someone has a better idea, they can always suggest it and it may become the new “company way.” But until the “new way” is approved and adopted, the old way is the only way.

• When your processes require experience and judgment but you hire people with little experience and questionable judgment, the results are often predictably bad.

• Creating checklists for the important and critical activities to document the process and to promote compliance improves consistency. Asking that some important checklists be initialed or signed helps to insure compliance and accountability.

Price management is critically important to the highest performers

I know that I am like a broken record on this one. (For those of you too young to know what a record is, look it up on Google. Sometimes when a record was broken it would skip backward and repeat the same part of the music over and over until someone intervened. It’s like when a CD gets a scratch and repeats the same music over and over or when you press the Repeat button. For those of you too young to remember CDs, it’s like when an MP3 file has a CRC error and repeats the same music over and over. )

• If you are selling more than $10M of product, you need a pricing manager. Remember at $10M, a single point of additional gross margin can be $100K in bottom line profit.

• Few wholesalers really manage pricing to its full extent and so if you are struggling, this is one of the very first areas to attack.

Prescription – Really get going on price management. Admit that there is more to be done and get someone assigned to the task.

Size matters — That’s the size of the business

• Over the years, we have observed that after wholesaling businesses reach a certain size, they are more stable and viable. That threshold has been growing over the years based upon inflation, the evolving regional and national competitors and with the introduction of technology into the industry. My observation is that the threshold is currently at about $20M. There seem to be a couple factors in this equation:

1. At $20M, the company is large enough to support some good non-owner people who supplement the ownership’s skills and energy.

2. The company can employ some full time experts in key roles where smaller company’s must rely on multi-role, multi-taskers who wear many hats but do not have time to become an expert in most areas.

3. The company has enough financial strength to weather some of the ups and downs of the world.

a. We have also observed a second threshold where the company outgrows the energy or abilities of the founder/owners and where a strong professional management team is required. That seems to be around $50M but may vary based upon the founder/owner’s situation.

b. Prescriptions –

i. If you are not at $20M, get into growth mode. While the economy is weak, your growth initiatives may make your current situation better and when the economy gets back on track you will be positioned to grow the company to a stronger and more stable size.

ii. If you are approaching $50M, take a hard look at your team to determine if the existing team has the horsepower you will need to grow the company.

Breadth matters too –

• A very narrow focus can, but not always, be dangerous. ?Even at $20M and above, companies with too many eggs in a single basket can be vulnerable if that basket gets dropped. Companies that were quite focused on new construction were vulnerable in this economy. They were sized and configured to excel in a booming new construction market and were forced to scramble when the new construction market vanished over night. Those companies with prudent breadth were better positioned to survive.

• A very broad focus can also be dangerous. “All things to all people” is a doomed strategy.

• Wholesalers seem to provide two functions:

1. Sales – Where they market products, take orders, offer credit and bill for the product

2. Logistics – Where they procure, warehouse and deliver products

• Premeditated expansion into adjacent markets that leverage the existing infrastructure should be considered periodically as means for solid incremental growth. The key question they should ask is, “What other products, customers and geography can we sell and support with the existing organization?”

• Move very cautiously into “stretch” business like retail as there are always hidden “gotchas” wherein you will pay your dues as you learn that business.

Good people are the hearts and souls of the great wholesalers

• Smart enough – Pre-employment testing helps to bring the best and brightest into your company. So when you promote from within, you have a pool of people who are promotable.

• Right attitude – In wholesaling, many of the products are fundamentally undifferentiated. In many instances, the only differentiators at the wholesale level are the services that surround the products or the price. The quality of the services is largely generated by having a team of people who genuinely care about their work, the company they work for and the customers they serve. To quote the car commercial, “There is no substitute.” Some people are good actors and can pretend to care but it is much better to find people who are wired that way.

Little things matter — The best wholesalers get the big things right but they also tend to the little things

• The best wholesalers take care of their people in pay and benefits but they also take time to show appreciation by saying thanks and to listen to their ideas and issues.

• The best wholesalers are continuously working to be reliable, reliable, reliable in serving their customers but they also take time to show appreciation and to listen to customers problems and to create better ways of serving those customers.

• The best leaders remember that, in everything that they do, their team is taking mental pictures of their actions and will emulate the very best and very worst snapshots in their mental album.

Buying companies is relatively easy, but operating these transplants is really, really difficult.

The best companies can buy and integrate companies into their operation effectively but they understand the acquisition game and play it well. Less expert buyers often “work” the numbers but sometimes ignore the “fit” and history of the companies. This can lead to a deal that looked good on paper but tanked in the real world. There are two scenarios:

• The selling-company is struggling — With some of the “size matters” comments in mind some smaller wholesalers may be seeking larger suitors as a means to long-term survival.

1. This is not a casual undertaking for either the seller or the buyer. Highly stressed sellers may not have the luxury of choosing who will buy them and may be forced to sell even when there are big concerns.

2. Sometimes buyers forget that an unsuccessful company doesn’t suddenly get turned around because it was purchased by a successful company. Buyers should always assume that they will need to exercise the same aggressive turn-around efforts that the seller would have used if the company had not been sold. If the buyer doesn’t have the team or stomach for doing the turnaround, it might be better to pass on the opportunity.

• The selling-company is excelling — A successful company may not continue to excel when the buyer mandates a totally different mode of operation. It is unreasonable to turn an acquired company upside down while expecting it to continue to excel. Often buyers squash the very characteristics that they sought in the acquisition and are then surprised when the acquired company’s performance suffers. They bought the race horse for its speed but are surprised when it cannot win races while hooked to a plow.

A final baseball comment: my daughter Jennifer insists that I clarify that, having lived in St. Louis for 30+ years, I am now a Cardinals fan.

I hope some of these observations will stimulate your thought processes toward higher performance. One final observation, is at the top of my list: This is a really good industry with a lot of great people and, even in these tough times, we are all lucky to be in it. Here’s wishing you a better 2011.

Rich Schmitt is president of Schmitt Consulting Group Inc., a management consulting firm focused on improving the profitability of distribution and manufacturing clients. Rich is also the co-owner of Schmitt ProfitTools Inc. (SPI), a business producing print, CD-ROM, web and palm-based catalogs as well as pricing management and analysis software for wholesalers. Go to www.go-spi.com for more information.