Warning signs can indicate trouble ahead

BY RICH SCHMITT
Management specialist

The American Cancer Society has for years had a list of seven warning signs related to cancer. These symptoms are the “check engine” light for our bodies. If you are experiencing any of these warning signs, it should trigger a call to your healthcare professional. I am positive that this program has helped millions of people detect health concerns earlier while they were more treatable. If you haven’t reviewed the list recently, seriously consider doing so for yourself and for those who you care about.

Businesses also have warning signs that can reduce the impact of problems, if heeded in a timely manner. As I consult with wholesalers, such warning signs cause me to dig more deeply into a situation looking for problems that might damage the business. The following sections profile my list of warning signs for wholesaling businesses.

Good people leaving

As we are consulting with companies that are experiencing problems, we often find that the good people are looking for new jobs or have already left. As a ship is sinking, even the rats are smart enough to scramble over the side before they are sucked under as the ship goes down. When your good, smart people are leaving, it is often a leading indicator that your ship is in trouble. When your ship is in trouble, these are the very people who are absolutely critical to the short-term turnaround and long-term prosperity of the company. If your key people abandon ship, the probability of survival diminishes significantly. 

While these people might say they are leaving for more money, you would be naïve to believe that they are leaving solely for more money. They typically find it easier say that they are leaving over a money issue instead of telling you that they think the company is faltering or is grossly mismanaged. Of course for some people money is the number-one priority, but for most people money is not at the top of the list.  Many of your good, loyal people will make an earnest attempt to work out their money issues if they believe they are with a good company, doing a job they like and in a situation where they feel appreciated.  When good people leave, you should suspect:

• Your company does not appear to offer opportunities for growth. Good people are typically not satisfied doing the same thing year after year. They want to grow personally and professionally. In many cases, they will seek out a company where growth is possible. The saddest situation is when there were opportunities and they were just not obvious or visible to the person who left for greener pastures.
• Your good people do not feel appreciated. Compensation cannot be wildly unfair considering an individual’s contribution and the market, but when people feel appreciated by the company’s leaders it is a big contributor to job satisfaction and lower turnover. You must treat the top performers better than you treat the poor performers. When you treat everyone the same, you may be sending a message that hard work is not appreciated. It is critical that your team feels that your rewards and appreciation are very directly related to their contribution and performance. (If you tell me that all of your people are top performers, I say that you are not a tough enough grader or you aren’t paying attention.)
• Your company has become “political.” Good people often resent that “suck-ups” are treated as well as or better than the real contributors. We all like to have our egos stroked, but as I conduct corporate physicals my bs detector goes off whenever I see employees sucking up to their bosses. That detector gets even louder when I suspect that the boss expects or seems to thrive on being “sucked up to.” Just like poker, when the smart players determine that the game is crooked, they get the heck out of Dodge.
• They think the leaders don’t understand the problems or that they don’t care about the problems. One of the intangible benefits of the corporate physical process that I conduct is that the employees see clearly that the leaders know there are problems and are trying to do something about those problems. Leaders often see that there are problems but the people in the trenches sometimes get the impression that the leaders “don’t have a clue” that there are problems. This causes the employees great anxiety. When the leaders admit that there are problems, that they care about solving the problems and that they are doing something about it, people are less concerned and more willing to stay and fight.

No people for expansion or to fill key roles

When you want to add a location and you don’t have someone ready to manage the new branch, it is a major warning signal. When your expansion dictates that you create a new department with a full-time manager and there is no one to fill the position, it is a flashing red light. When a key person leaves, retires or has health issues and there is no one able to step into the vacated role, it is a red flag.

I am certainly not advocating that you create “fat” in the organization, but you should always have a group of “promote-ables” ready. The best companies are continuously grooming talent within their team for expanded roles and always have openings for top-quality people who become available in the market. When you don’t have people to fill key roles this might mean:

• Your development processes take too long. The world is moving way too fast for wholesalers to continue their 10-year training process to get someone from the warehouse to a lead inside or outside sales role. The first step is to hire smart people. When you hire smart people you will be surprised how quickly they can evolve into expanded roles. (With smart people you often must ensure that your training procedures are not limiting their progress.) Further, you should be considering the training materials created for our industry by asa and hardi as the basis for development process. There is no point in reinventing the materials that they have already created.
• You are not planning for growth and considering ways to develop or acquire the necessary talent for that growth. Wholesaling is talent-intensive and you will continually need people for growth. I often find wholesalers who are full of 25- to 30 year employees. This is a double-edged sword. Their experience is invaluable, but they will probably be headed for their bass boat in the next couple of years with no one trained to fill their shoes. Truthfully, there are probably poor performers in your company who ought to be replaced,  but are not simply because there is no one available to fill their shoes.
• Your good people have already abandoned your ship. (See good people leaving above.)

Metrics below top-quartile or top of top-quartile

For years we felt that high-performance wholesaling, from an investor/ owner’s standpoint, began when a company achieved top-quartile performance. (Their metrics put them into the top 25% when compared to their peers in the industry.) Lately, top performance -- from an investor/owner’s standpoint -- seems to require performance in the top 15% or 20% among their peers.  Here are some of the measures that we watch:

• Sales/profit dollars (raw) not growing or sales/profit dollars (after adjusting for inflation) not growing. When the economy was great, almost all wholesalers were growing. Some, however, were not growing after adjusting for inflation. Their raw sales/profit dollars were up, but the increase did not exceed the rate of inflation. (For an inflation adjustment chart, e-mail me at rich@go-spi.com.) Even now as the economy is cooler, you should still be working to grow. The best companies are aggressively driving to take share from other wholesalers who have opted to take a “wait-and-see” attitude. Such businesses are sitting ducks for their growth-focused competitors. If you don’t intend to grow, you should at least be aware that some of your competitors may be on the attack.

• Sales in Units not growing. In some cases, the raw sales dollars exceed the inflation rate while the units-of-product-sold are flat or down. When there is inflation in the cost of your products you must also monitor your sales in units to determine if you are holding your own or losing ground. The recent inflation in copper, for example, has boosted the dollars even while pounds and units may be decreasing. The 13 seer changeover to higher-cost-per-unit equipment has increased dollars while unit sales may have declined. This means that you might be growing revenue while you are actually losing market share. That strange sound you hear may be someone else eating your lunch. 
• Expenses as percent of sales or per unit. Normally, keeping your expenses in line as a percentage of sales is a good gauge of expenses. Ideally, the intent is to have expenses trending down as a percent of sales. You should be working to become more efficient over time. Also, as you grow, your expenses as a percent of sales are ideally decreasing because many fixed costs do not increase at the same rate as sales dollars. Said another way, when you see that your business expenses are growing at a faster pace than sales it should be like the smoke alarm in your home -- you should be investigating the cause immediately. Further, so you are not lulled into a false sense of comfort, you must break out the inflated products and wash out the impact of inflation to determine if your expenses are really in line. 
• Accounts Receivable too high. As the economy has slowed down, many contractors’ ability to pay has slowed or dried up. Some contractors are living behind the power curve where the next job pays for that last job. When there is no “next job” there is no way to pay for the last job. Remember how the musical chairs game works? Someone always ends up without a chair. You must be working to be the first-paid wholesaler -- not the guy at the end of the line who is without a chair when the music stops. I would also review whether you’re A/R reserves are adequate. Your 120, 150 and 180 days past-due accounts are truly a concern.
• Inventory up and turns headed down. Your inventory team must be adjusting their stocking levels for the current market. Further, you have to ensure that you maintain the proper balance between your fast- and slow-moving products. We sometimes find that the inventory team is operating to the total budget while the branches are stocked out of “A” and “AA” products.  Too much of the budget is committed to “C” and “D” products.
• Gross Margin headed down. There is always pressure on pricing and, thus, your margins. The current environment is certainly more intense than it was a year or two ago. If you do not have a full-press effort to offset margin erosion through price management, it is a concern. I am not talking about lip-service. I mean the analysis and adjustment of pricing, conducted several time a year for each and every sku that you stock and sell.
• Productivity per head or per payroll expense dollar. While productivity measures can vary throughout the country based upon many factors, they need to be monitored to ensure that your productivity is in the ballpark compared to your peers. Ideally, productivity should be increasing over time as the company invests in technology, equipment and facilities. One of my pet peeves regarding these types of investments is that few wholesalers project their roi in advance -- and even fewer determine whether the project was a success in the end.  The hard truth is that many of these projects should allow the business to operate with fewer people, yet after the investment the same number of people are still on the payrolls.

Not discounting

When a company is not discounting, it should be a red flag for the owners since it often indicates that too much cash is locked up in inventory that is not moving, in receivables that are not being collected and/or a line of credit that is near or at its limit. The inability to discount is always a red flag for me as a consultant, for your suppliers and for your bank.

Vendors becoming disenchanted with your performance

When your vendors are getting concerned, it might be their yearly press to get you to pay attention to their lines or it might be that your performance is truly eroding. While you must remember that a vendor’s motives may not always be pure, your good venders will level with you and may be able to suggest areas of opportunity for your company. 

Bank concerned with your performance

I start with the caveat that many bankers do not understand hard-goods wholesaling. One of your tasks as a wholesaler is to educate your banker about your business. When your banker gets concerned, you must sit up and pay attention. They provide the operating cash for many wholesalers, and when their key measures and ratios get out of range many times they will be required to act. 

Losing target customers

You will always be losing customers and gaining customers. Some price-focused customers love you when you’re low and hate you when you’re high. The good news is that their love can always be quickly rekindled by simply offering the lowest price.

I get most concerned when the customers who ought to be buying from you stop buying from you. If you target service contractors with the products, pricing and support that they need, you ought to be getting a fair share of their business. When these customers who ought to be buying from you are going elsewhere, it is a smoke alarm type of warning.

Not fun anymore or you --  and your team is losing “the fire”

If the business isn’t fun any more or the management team has lost their fire, it is a warning signal. Frankly, some owners and managers have been doing this for many years and they would rather spend their time playing golf, at civic meetings or on their boat. I think they deserve that reward for their years of service. But, they do not deserve the right to pretend that they are filling the role that their title denotes.

When they work short weeks and short days, it means that the ship is without a captain much of the time. The investors and other team members deserve a management team that is fully present and fully engaged in their job. One president, who had pretty much retired to his boat, told me that he couldn’t find anyone to do his job. My response was, “Maybe we can find someone to work full-time and do about as well as you are doing in your part-time, disinterested position within the company.” I know those were hard words, but he had hired me to fix some tough problems and to paraphrase cartoon character pogo, “I had met the enemy and it was him.”

While most of these warning signs do not, by themselves, portend disaster, each should be considered serious and addressed immediately. When you have several of these signs, it may be time to call a wholesaling specialist for a checkup. For more information on our Corporate Physical process, e-mail me at Rich@go-spi.com.

If you are attending ASA/Network ‘07, come to see us at our Schmitt ProfiTools booth #219 or at The Wholesaler/TMB Publishing booth #512.  If you are attending HARDI, stop by our Schmitt ProfiTools conference booth #129 and our Solutions Center booth.

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.