Tough times are just beginning

by Bruce Merrifield

Wholesale distribution channels have been generally challenged and consolidating for years, but the distributor-to-industry sector has been sorely tested by a prolonged slump for the past 18-plus months. 

Manufacturing America, which these distributors serve, was the first sector of the economy to go into recession and it may be the last to emerge. Global excess capacity continues to expand, especially in China which now can make all goods of equally excellent quality for 5 percent of the cost in the U.S. and Japan. The chronic high dollar sucks in imports and gives U.S. manufacturers zero pricing power.

Economists, who are paid to see positive news, predict that a U.S. recovery is underway as of March 1. However, independent analysts see uninterrupted, debt-financed consumer spending and universal commercial and government debt overhang causing weak demand for fueling any recovery. The Conference Board surveyed manufacturing CEOs in February on their plans, and 77 percent saw no growth prospects for the next six months and were sticking with austerity plans, which is another possible recovery dampener.

An indirect measure of distribution CEO’s current confidence was the lack of registrations for attendees for the spring session of the “University of Industrial Distribution," a twice-per-year educational week of courses supported by 20 distributor-to-industry trade associations. 

The UID was cancelled because the registrations were only 10 percent of what normal student attendance was running a few years ago. In tough times, educational expenses are seen, rightly or wrongly, as a discretionary spending item that can be cut.

Need a motivational boost for offsetting tough times fatigue? See the critically acclaimed movie documentary currently in theatres entitled: “The Endurance: (Sir Ernest) Shackleton’s Legendary, Antarctic Expedition.” It tells the story of an explorer who after failing to be the first to get to the South Pole, decided to try to be the first to cross the continent of Antarctica in 1914; an arguably ego driven mission. A series of bad-breaks turned the trip into a two-year, leadership endurance challenge to get all 28 people home alive. The movie makes our current economic challenges seem like a walk in the park.

Which path to take?
Like Sir Ernest, many distribution executives may have had expansive plans before things started to deteriorate. During economic downturns, there are at least two contrasting strategies to pursue. Play safe and die slowly in the long run; or accept reality and reframe our actions to not only survive the downturn, but shift to a high performance path.

Many CEOs already chose the first path by battening down the hatches to ride out the storm in hopes of continuing business as usual with an upturn. The sequential step drill is to: cut all discretionary expenses (including UID registrations), freeze wages, then cut wages across the board, layoff people in proportion to the decline in sales and finally to continue to hibernate until warmer economic conditions definitely arrive.

There are three main problems with this simple survival solution.

Many managers never fully confess their sins of expansion and diversion committed during the good times, so they don’t shape up or shut down some of their biggest losing, pet projects. 

For example, many big integrated sole supply deals were won with great effort and thin margins over the past five years. Many lost profit from the start and now even more are losers. So, when big customers ask for more downturn concessions, what’s wrong with renegotiating the contracts to be profitable or see if customers will walk away and paralyze some other competitor? 

Ditto for newer additional branches that have been losing money for too many years. Managers should say: “Volume is vanity, profit is sanity. Downsize, upgrade, refocus and revitalize. Less is more.”

Cutting back oats for the corporate horse during a downturn does not ask the big question: Why was the company such a poor performer before the slump? For fiscal year 1999, 90 percent of distributors, for example, were averaging annual sales growth of 2 percent and making a return on investment that was less than what shareholders could have made in municipal bonds(1).

Corporate liquidation would have also freed all employees, customers and suppliers to go find more strategically effective companies that could deliver better, long-term economic benefits to all stakeholders. If a company was a resource trap before the downturn, why starve it now to try to get back to minimal performance in the next up-cycle?

Will a hibernation strategy even get a resource-trap company back to bare existence in the next upturn? More companies fail after economic slumps are over than during them because they are so financially weakened and demoralized from hibernation treatment. They can not keep their best employees, customers and suppliers from leaving for better, stronger, faster expanding competitors.

The turnaround, renewal option?
If we don’t like the implications of the three problems above, then there is an alternative: the "hit-bottom, sober-up and reinvent the company" choice. 

We can admit that we made past mistakes that we can no longer feed and shape them up or out now. We can assume that our unspoken operating assumptions were giving us poor results before the downturn. We need to articulate these assumptions, then discuss them in contrast to proven, high performance success assumptions and finally make choices and changes. Without admitting our past mistakes or surfacing and challenging our flawed assumptions we can’t be open to considering and adopting new ones.

We must also admit that we can’t make turnaround tactics or renewal programs work unless all employees are part of the solutions. At low performing distributors, the front-line employees are unaware, uneducated parts of the problem. How will we educate all employees about many things affordably and continually?

Making the big confessions above is actually the easy part; successfully executing a turnaround renewal effort is tough, although much easier than Sir Ernest Shackleton’s recovery plan. The total effort typically breaks into two inter-related parts: weeding and feeding. Companies need to rank all of the vital elements of their business: niches of customers by strategic importance, customers within niches by profitability, employees by net productivity, branches by viability and suppliers by importance for target customer niches. We must then manage the extremes; shape up or move out the bottom percentiles of each element group in order to refocus on and feed the top 10 percent that are more than 50-plus percent of the historic and future strength of the company.

The prioritizing of customer niches by strategic importance is critical to the renewal plan. We can’t just downsize and upgrade elements, we must also be re-focusing and re-directing ourselves towards niches of customers in which we can become a dominant No. 1 with 50 percent or more share by distribution center region. Because both manufacturing marketing efforts and distributors have been historically product and volume driven, it isn’t easy to conclude that selling everything to the best, growing customers within one niche at a time is the best way for growing both faster and more profitably, but it is.

Shackleton's reframing and increased education
Sir Ernest gradually and painfully had to give up his last chance to achieve exploration fame, but he was able to find a new noble mission of leading everyone home safely. How many distributors will be willing to give up their hibernation strategies and reframe their downturn opportunity to one of becoming a high performance service company that delivers premium economics to all stakeholders?

For those distributors that might want to at least consider all that goes into the turnaround- renewal option, watch and discuss the video, “High Performance Distribution Ideas for All.” It is an affordable, on-site, educational alternative compared to more expensive, general educational offerings and it is formatted in short modules for sharing with all employees.(2) The big cost will be the time that managers and employees must invest in digesting all of the content. Considering the hidden drawbacks of the hibernation strategy, donating some time to break-room learning might be an easy sweat equity decision to make. What do you think?

[1] ROI numbers from Improving Distributor Profitability by Al Bates, Profit Planning Group, pp. 8-10. Available from www.nawpubs.org. Sales growth rate from Industrial Distribution Association’s “Profit 2000” by Al Bates, Profit Planning Group.
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[2] For much more information on the video go to www.merrifield.com.
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