Smart strategies for a challenging economy

by Dave Kahle

Yes, we are in the middle of a slowing economy. In many segments, business is down significantly. Distributors are facing the prospect of lower sales and gross profits. The question on everyone’s mind is: What should I do about it?

The knee-jerk reactions are easy to identify: Cut costs; lay some people off. Get more aggressive about accounts receivable. If cash flow gets tight, extend your payables. Wring as much cash out of your inventory as possible. Reacquaint yourself with your banker. Those are all classic responses to the prospect of reduced revenue. They’ll help you get through a tough time.

Here’s an additional suggestion. View this time as a great opportunity to make structural changes in your business – changes that will bring you greater growth and profits when the market swings back up.

In other words, instead of just implementing some temporary, cost-cutting and cash-flow-enhancing tactics, consider a series of longer-term, structural changes in your business that will position your organization for greater growth.

This is a good time for you to implement such deep and significant change. Your employees know that business is down.

They know that you have to make changes. They see the cost-cutting measures, and they know the people you have laid off. They realize that things are changing, and they are more accepting of it. They also know that if you don’t make some changes, their jobs may be at stake. So, they are much more likely to support major changes now, when they are in that mind-set, rather than a couple years ago when they knew that you were hard-pressed to find a replacement if you needed to do so.

Attitudes, now, are much more conducive to change.

In addition, many distributors now have the time to “work on the business, not in the business.” We all know that it’s difficult to make significant structural changes in your business when you are trying to expedite that truck load of backordered product, nudging up your line of credit and trying to hire yet another driver or customer service rep. As those urgent matters ease up, you have the time to address longer-term issues.

Strike while you have the opportunity - NOW!

Where to focus
OK, you’re convinced. So your next question is: Where should I focus first? The answer to that should come from a thorough audit of your organization and business processes, and will be different for every company. While I can’t answer that question, I can make a case for some specific, proven initiatives for you to consider. As a consultant whose major area of expertise revolves around sales efforts, I’d lobby for you to take a hard look at how your sales are doing. There are several reasons for that.

First, the sales force typically represents your largest single category of cost. Do this little exercise. Add up all of the wages, fringes, taxes and expense reimbursements for your sales department – that’s your field salespeople, your sales managers, inside sales people, etc. Come up with a number for some accounting period – say last year. 

Now, express that number as a percentage of the gross profit the company achieved for that same accounting period. Typically, your sales efforts are going to cost you somewhere from 20 percent to 35 percent of your gross profit – depending on the size and sophistication of your business.

Now, see if you can find any other category of costs that comes close to the size of that number. There is probably no other area in your business that costs you as much as your sales force.

Doesn’t it make sense to focus where the money is? When you are sitting in your office at 7:30 tomorrow morning and contemplating where you ought to focus first, ask yourself where you are spending the most money. I’m betting your answer is the sales force.

Here’s another reason to focus on the sales force. For a number of distributors, sales management in the last few years can be characterized as “hands off.” It has been hard to find and keep these people – you didn’t want to do anything that might jeopardize that. So, it is likely that many salespeople have become entrenched in habits that may not be effective, sales policies have not been dusted off and examined, and sales processes have not been tweaked in years. You are overdue for some significant improvements in how your company does sales. Strike while you have the opportunity – NOW!

Three initiatives
Here are three proven initiatives that you can undertake now that will position your company for more rapid growth and profitability when the market turns up, and will make your sales efforts measurably more effective and efficient.

1. Demote some customers.
You are probably losing money on 50 percent of your customers. I know, that’s a strong statement. You’d need to do a detailed cost analysis to come to a similar conclusion. Actually, this number is very conservative. From my personal experience, every time I’ve been privy to customer cost analysis reports, the conclusion has always been the same – 10 percent of the customers provide all of the company’s net profits. The other 90 percent are subsidized by the top 10 percent. If you really wanted to be radical, you’d fire all but the top ten percent. I’m not advocating that.

But I am encouraging you to look closely at your customer base, and to make some cold-blooded business decisions about in which of your customers you should be investing for the future. Do some analysis on what a profitable customer looks like in your business. Create a profile, and apply that profile to every one of your current customers.

Then think about what you want to do with the resulting information. You may want to fire a certain portion of them. That doesn’t mean that you stop doing business with them. It does mean that you increase their prices, add delivery charges, implement minimum order sizes and stop paying sales commissions for their business. There may be a portion of them that you may want to take away from the outside sales force.

I once worked with a client company at which we took 50 percent of the customers out of the hands of the field sales force and assigned them to a new inside sales department. The net effect was to provide them better service, reduce sales costs and free up high-cost sales time so that it could be invested in high-potential customers.

There may be a portion of the customer base in which you choose to invest more substantially. These are the high potential, growing customers who have the ability to disproportionately grow their business with you. You may want to direct more selling and servicing time to them.

When you arrive at the other side of this initiative you will have restructured a major component of your sales system. You will have reduced your sales costs, gotten rid of some loser customers, made some marginal accounts profitable and redirected your investment of sales time into those accounts that have the potential to grow disproportionately. You’ve reduced costs, and positioned yourself for greater than average growth when the market turns around. Smart. Strike while you have the opportunity – NOW!

2. Rethink the responsibilities of your sales people
Now is the perfect time to rethink the fundamental way in which you have your sales department organized. Many distributors have sales organizations that haven’t changed in a generation. Salespeople are assigned geographical territories and paid commissions on all sales. This system was perfect ten years ago. But is it effective today?

Ask yourself a bunch of “why” questions. Why use geographical territories? Why pay commission on every dollar of sales? Why assign every account to a field salesperson? Would you be more effective if you took all the small accounts away from the field salesperson and assigned them to an inside sales force? Would you be better off paying commission only on the growth of key accounts? Should you pay for only new sales? Would you be better off with fewer, more focused sales people? Should you have product or segment specialists? 

This is a great time to wipe the slate clean, and ask some fundamental questions. What do you really want your field salespeople to do? And why? If you start fresh, you may discover answers that lead you to a whole new definition of the job. Now is the time to do that. Strike while you have the opportunity.

3. Invest in improving your people.
Few distributors actually invest time and money in improving the performance of their sales staff. That’s too bad. If you do, you’ll gain a competitive edge in a number of ways. 

First, you’ll improve the performance of your salespeople. One of the characteristics of the job is that no salesperson is ever as good as he/she could be. There is always room for improvement. This is particularly true for distributor salespeople, who, for the most part, have received little training in how to do sales well.

When they are trained in the best practices regarding such common sales tasks as creating rapport, asking questions, presenting solutions, managing key accounts, closing the sale, and managing their time effectively, they will invariably incorporate some of those practices into their routines, and improve their performance. So, you get the benefit of significant ROI on your investment in sales training. 

But it goes beyond that. Put in place a system of investing time and effort in improving your people, and everyone recognizes that you are an employer who cares about his/her employees. Spend money training your people, and they view that as a benefit – a reason to stay with you. You reduce your turnover rate, improve your employee loyalty and field a more competent sales force. Not a bad move. 

Your investment in the growth and development of your people also becomes a competitive advantage when it comes time to hire a new salesperson. You’ll attract better quality people, because they recognize you as an employer who can and will help them grow. Put yourself in the shoes of a prospective salesperson. Who would you rather work for – a company who says “We expect you to learn by trial and error, on the job,” or one who says, “We have a system of investing regularly in your growth, helping you become the most effective you can be?”

Now is the time to put in place a systematic approach to training new people, and continuously improving your experienced staff. As you gradually improve the competency of your sales force, you’ll find yourself gaining market share, outselling the competition, and gaining loyalty from your suppliers. 

Yes, it’s true that the economy is more challenging now than anytime in the past ten years. And it’s also true that this slowdown offers you an opportunity to make substantial, structural changes in your business that will serve you well for the next ten years.

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