It might be time to change your game plan

BY RICH SCHMITT

Management specialist

“If you do the same things you can expect the same results.” This is a quote that I have liked for many years since it reminds us that different results require us to move beyond hoping for change and, as appropriate, into actually doing things differently. The quote is sometimes attributed to Einstein but for all his intellect, I cannot believe that he was thinking about today’s economic climate. It would be really great if we could all just do what we did two or three years ago and see the same results.  Those were great years and great results.

Unfortunately, in this economy companies who do the same old things will almost certainly not see the same great results. Further, the same actions may cause companies to lose ground. The problem is that even if what those companies were doing was correct and appropriate for their situation two years ago, the world has changed greatly. We are in a different game and there are new rules. To assume that “staying the course” will work is probably a bad assumption and could be a catastrophic mistake for some.

I don’t want to imply that everything wholesalers were doing two years ago is wrong; just that it is high time to rethink all assumptions and adjust your focus as appropriate for your current situation.  So I want to discuss a couple of areas in which you can reassess what you are doing to determine whether you are on the proper course.

Customer sensitivity

In many (probably most) markets, trade customers are hurting. The residential new construction contractors are really hurting. I was talking with a carpenter recently and he explained how hard it was to pay his bills and support his family. Carpentry work is sporadic and there are many guys vying for each job, so he is making ends meet working as a cable tv installer. This was a sober, hard-working tradesman who would have been turning down high-paying jobs a couple of years ago. 

While commercial work is sustaining some of the more diversified contractors, the smaller or residentially focused contractors are struggling. I am sure most readers had figured this out long ago, but I sometimes wonder if they understand the magnitude of the pain as I hear about some of their comments and activities. Two or three years ago, that lavish golf outing was a nice break for everyone from the crazy pace of non-stop work. The same outing might be poorly received by your customers in this economy. When people are struggling to feed their families, they can get offended by expenditures or actions that would normally be off their radar. 

I was talking to a wholesaler a short time ago and he mentioned that they were doing some routine maintenance at one of their locations and several contractors had commented on the fact that they must be doing pretty well to be able to afford luxuries like paint. One commented that he now understands why the wholesaler’s prices are increasing so much. The wholesaler said he thought the comments were mostly in jest but worried that there might be a grain of criticism in their observations. I am not suggesting that you ignore maintenance, but you and your team must understand that there are a lot of contractors who don’t have the money to paint their shops and might resent your apparent prosperity.

So it is critical to carefully adjust those visible activities so you do not offend your trade partners. It is a tough balance to show your appreciation for a customer’s business and the relationship that you enjoy while spending money that customers, rightly, know that they gave you. I am not recommending that you cancel this type of “appreciation” event, but I am recommending that you do it with a high level of sensitivity to the contractors’ plight. In all instances, you want to show that it is the relationship that counts and that you do appreciate their business. 

Some wholesalers who are also struggling may decide to throw that great party for their customers just like last year with the best of intentions. The intent being to show their appreciation to customers even though they really can’t afford the party. This is shooting yourself in both feet, to spend too much on a party you can’t afford and, in the process, offend your good customers with your irresponsible spending. If your business is a train-wreck, I certainly wouldn’t broadcast that fact to your community, but I also wouldn’t pretend that it is business as usual for your company either. 

It is important that you communicate these topics with your team so they are all on the same page and can conduct their customer interactions with the proper sensitivity. (There are probably some of your team who do not understand how the economy is impacting your customers and how they should be sensitive to the situation.) I think projecting an attitude to your trade customers that “we’re all in this together” goes a long way with them. This is always a delicate balance where you are creating a sense of stability and security for your team and customers while not projecting the impression that you are gouging customers.

Inventory management

It is critical that your inventory management team raises the bar on their performance. Continuing the same style of inventory management will probably result in too much inventory overall and shortages in critical products. The first and most critical task is to get total inventories sized for the current and forecast level of business. This is an area where many computer-based replenishment recommendations must be carefully reviewed. These systems are often based upon sales history, and in changing market situations raw history may not properly predict the future demand for products. Following are several action items for you and your team.

• All computer buying reports must be reviewed more rigorously than in a “steady-state” economy. For example: In a declining economy, your purchase quantities can be inflated when you are using last year’s usage (common for seasonal products) to create the demand used in purchasing.
• Sales, marketing and senior management should provide forecasts that are folded into the purchasing activities. To be blunt, many companies provide their purchasing people with, at best, darn little market forecast information. So on one hand they provide no input into the process and then chastise the inventory team for having too little or too much inventory. Just like computer systems, purchasing people can only base their buying process on the data they are provided. Senior management must insist that sales and marketing provide input into the demand forecasting, then share in the praise and abuse when there are problems. Many sales and marketing types would rather say to the purchasing team, “You have all the numbers. You figure it out. I’ll support your decisions, unless, of course, you mess it up.”
• The inventory team should review the settings (like demand calculation, safety stock, lead times, etc.) in your inventory system to ensure that the software is properly tuned for the current economy. As I work with wholesalers to improve their purchasing processes, it is amazingly common to find that the purchasing software settings were entered when the software was first installed and have not been changed since. Seldom does a wholesaler or installer understand the situation completely during installation so they “swag” the settings saying that they will readjust them someday but someday never comes. 

I also think that changes in the market or supply chain should trigger adjustments to the settings in the purchasing system. One of my favorite examples was a wholesaler who set their purchasing system to maintain a 45-day supply -- assuming the manufacturer would ship from their factory that was 2,000 miles away. After the manufacturer literally opened a big distribution center 2 miles away, the system remained set based upon the old assumptions, resulting in an unnecessarily high level of inventory.

• Part of the reforecasting process is to predict the changing ratio of residential, commercial and add-on/replacement products for the future. Using historical data, the ratio might not be representative of the future since the ratio from last year might have very little to do with this year.
• This is an opportunity to remind you that very few purchasing people understand and fully utilize the expensive computer system that the company has provided to them. Now is the time for them to get reacquainted with (or maybe introduced to) your software, and to ensure that they are using it to get the best inventory turns and the best returns on your software investment.

Credit & collections

It is also critical that your credit and collections team raises the bar on their performance.  Now is the time for senior management and credit & collections to determine whether the credit policies used in the past are still appropriate for today.  The review should include:

• Credit policy and application for new customers -- Should be reviewed and probably revised. I always recommend getting personal guarantees so the contractor has “skin” in the game.  Banks might not lend money to some of these guy but if they did, there would always be personal guarantees and collateral involved. While you are doing this you might want to have your attorney review your documents to ensure that they are proper based on the latest changes to the laws in the areas you serve.
• Policies for existing customers -- These are hard to change since backing away from your loose credit controls might unnecessarily offend customers. If your policies are dangerously loose, you must do what you can to regain some control. Any customer that you are allowing to work out a problem ought to be asked to sign your latest credit agreement that includes personal guarantees. 
• Record keeping -- Make sure that your team is keeping the proper notes and records to support your ongoing collections work as well as any legal actions that might be required to collect your money.
• Senior management’s support of your collection activities must increase in tough times --  Blowing off a credit manager is not as difficult as blowing off the president or owner of a company. Of course, dead horses are dead horses, but senior management involvement may trump a competitor’s credit manager when there is money available to pay some -- but not all -- creditors.

These are just a few ideas to get your thought processes going. Take time to rethink, then explicitly continue or change the way you are operating in this economy. Your outdated operating assumptions may or may not apply to your market and operation going forward. I would never recommend changing anything for the sake of change, but I also would not recommend the continuation of any business practice just because it worked a couple years ago. Take time to rethink what and how you conduct business so you can be a winner in this fun game we call wholesaling.