While the lead article's title - Manage the Panic of 2009 - might seem extreme, it's important to clarify its real meaning. Reports we're hearing from distributors in January indicate they are not in panic mode. On the contrary, every distribution company has become very focused by necessity on cost control, created by the panic and instability in financial markets.
I think that's an important distinction. This isn't a typical downturn, where a company just needs to reduce costs across departments by a certain percentage until the tide turns. This time a distributor needs to upgrade financial skills.
The traditional financing and cash flow models distributors have used for decades have changed significantly, with much tighter and in some cases very different parameters in place. In many cases, the credit tools and levers distributors have used to grow their businesses have either disappeared or been reduced significantly. The result is that traditional rules of cash flow management, which distributors historically have leveraged effectively, are outdated. Those who manage cash flow and credit functions in 2009 in the same way as before are on thin ice.
The natural conclusion from this shift in financial foundations is that those companies with a stronger and more flexible financial position - regardless of the length of the downturn - have much more opportunity to emerge with a stronger market position. That's obvious at one level - better capitalized companies tend to outperform weaker ones. But in practice this core competency requires a very different management approach and benchmarks to monitor.
Do you manage your credit functions strategically, or has it been a broad-based sales tool and expense? Have you reduced inventory levels to an optimal level and improved forecasting capability to free some cash without hurting service levels? As Brent Grover notes in this article, as both supplier and bank financing get tighter, distributors have to get more nimble and attentive to up-to-date financial metrics.
As in every business cycle, distributors who adapt more quickly to the new conditions gain advantage over competitors. In this downturn, the focus has to be on gaining the maximum amount of financial flexibility and freedom to keep positioning for future growth.
On another note, MDM is committed to expanding our coverage of emerging growth opportunities for distributors, including globally. On page 4 of this issue you'll find the first in a series of monthly analysis of specific markets, with a look at Brazil.