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Indicators the past month have largely been positive across most distribution sectors. And at industry meetings, executives are looking forward instead of down. That's a great change from a very tough year. At the same time, I have not heard anyone say we are out of the woods.
From our surveys, we found that many distributors were forced to use layoffs to stay viable, and many more did everything in their power to avoid layoffs or use them as creatively as possible.
A recent cover story in Newsweek (Layoffs are Bad for Business, Feb. 15, 2010) looks at how downsizing has become a trend in good times and bad as a profitability management tool. The argument is that layoffs can preserve profits when demand drops. But the article pokes some holes in the conventional wisdom about layoffs increasing productivity and even profitability.
One of the letters in response to the Newsweek article made a great analogy: Layoffs are like running a car without an oil change at very high speed. You can do it for a short period of time, but the long-term damage is very expensive. This was from someone who taught operational management. I think distributors intuitively recognize how damaging layoffs can be.
In some cases, companies are cutting costs short-term, and losing value long-term because of loss of history and perspective.
On the customer side, it's creating new opportunities for distributors, but also headaches. Every distributor has customers who reduced work force – often those with higher paychecks – to manage costs. While some companies pruned carefully, many large companies cut to the bottom line, not the value line. So every distributor has run into the chaos and turmoil as their customers have lost knowledge of process and relationships that formed the basis for an ongoing valuable customer relationship. It's more work at the very time when you have the fewest resources!
From a distributor's standpoint, where relationship equity with suppliers and customers defines much of the value they create in the marketplace, it is terrifying to have to balance payroll with inventory levels when considering the best way to survive. Those managers who were able to preserve their teams through the downturn now have a significant asset in place to manage growth.
That's a competitive advantage in many markets today. With the current market instability, don't underestimate the value of the market and customer knowledge your company was able to retain.