In a recent interview with MDM, Profit Planning Group's Al Bates says that distributors must manage their loss of sales volume in a down economy.
"If sales are down 20%, you've got to make dramatic changes. In that scenario, too often distributors do what I think is absolutely the wrong thing in an attempt to free up cash," he says. "They try to lower accounts receivable and reduce inventory to make up for selling less. Inevitably that leads to sales declines getting even worse. Back orders go up. Customer service goes down and what might be a 10% sales decline becomes a 15% sales decline." While cutting inventory and accounts receivable is a normal reaction, Bates tells MDM that the moves are compounded by the fact distributors don't have much cash.
The answer is making it up on the gross margin. Most distributors - even if they do a good job on gross margins - have inefficiencies they can address, he says.
"The concern is that in a down market, most people say, 'I can't raise my prices.'" But Bates says you can raise prices on slower-moving items where pricing has been adjusted down for one customer and then down for everybody. "It's really a time to evaluate pricing. … For most businesses, there is potentially enough gross margin to make up for the sales decline – at least two-thirds or three-quarters of the sales decline. If I manage the gross margin area properly, I wouldn’t smile through a recession, but at least I wouldn’t be frowning as much."
Read the full interview with Bates, "Busting Profit Myths in Distribution," in the latest issue of MDM. Click here.
