The 2020 Mid-Year Economic Update_long

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Remember those first-generation efforts in standardized numbering, bar-coding and other ways to automate through technology or process improvement? Remember the quality movement?

For those engaged in independent distribution channels 20 years ago, there was much discussion about how the channel had to tighten up to remain a viable part of the supply chain. Too many redundant activities were taking place at the manufacturer and distributor levels, and customers would migrate to more cost-effective supply sources if their current suppliers did not find ways to be more competitive. Oh, and distributor margins were going to have to squeeze to pay for this improvement.

It’s more than ironic that at a time when the economy is choking on high unemployment, many distributors are finding it hard to find good talent. It’s a warning sign you can’t ignore. How good do you want your company to be through all this turbulence? Pretty good? Great? The best?

You need engaged team members scrambling just as hard as you to find the right answers to deal with the upheaval right now. In most cases it’s not the same skills as five years ago.

I've been to more than a dozen industry events over the past few months – association annual events, technology summits, marketing group meetings. It's great to see some momentum starting to build that's great to see. There are also some common threads in the conversations taking place at these events. In one form or another, every distributor is rethinking the right model for 2010 and beyond – one that's leaner, more productive, but built on the strengths, values and relationships that built a successful company in the first place.

I’ve been using a saying attributed to Warren Buffet this spring in presentations to groups about current markets: “It’s only when the tide goes out that you learn who’s been swimming naked.” At this point, the more appropriate saying might be: “You can drown when the tide rises above your head.” The Ch. 11 bankruptcy protection filing by Alamo Iron Works on April 5 was triggered by what the company alleges was non-payment of $1 million for work by a large customer.

This is not likely to be an isolated incident. Increased sales are great, but I’m hearing about difficulties with supplier lead times, financing inventory and cash flow.

MDM lost a long-time contributor and friend last fall. Bill Hodgdon, a consultant with a strong manufacturing operations and marketing background, died from complications with cancer. Over 18 years, Bill wrote many articles for MDM and spoke for many distribution associations. He consulted with international manufacturers who sold through distribution and helped them with channel strategy and tactics. Bill had a unique perspective.
Nearly every distributor took a beating in 2009. A few are still getting kicked while they're down. If you're a competitor to Airgas or HD Supply, that turmoil couldn't come at a better time.

Case 1: Airgas is in a fight for its life. In February, Air Products made a hostile bid for Airgas. It has been getting more hostile since. The investor analysis by Air Products is at www.airgasoffer.com. And here are the documents Airgas has produced for its investors to fight the offer.

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.

Grainger's investments into e-commerce 10 to 15 years ago don't look like large gambles today, but as our lead article by associate editor Jenel Stelton-Holtmeier illustrates, it was in fact a large dollar amount for what the adoption rate was at the time and also the company's culture. I was publicly skeptical at the time, questioning whether it was bleeding edge rather than leading edge. How smart was I?

As the timeline illustrates, Grainger's online sales took off with the dot-com era by 1999. It has continued to scale up along with the Internet.

Tenney Campbell, the well-known owner of a fluid power distributor, died in mid-January. He was ahead of his time in many ways. He will be remembered as a person who had an impact in this world beyond so many friends among fluid power distributors and manufacturers. He sold his California business to Berendsen Fluid Power in the mid-1990s. He continued to work for the company a few years in the capacity of corporate curmudgeon.
 
His role in those few years was to “create heat, smoke and discontent” among the company’s management, according to distribution consultant Mike Workman, who called Tenney a longtime friend and mentor.
Eight years ago, we were in the thick of the last industrial recession. Most distributors enjoyed a good run during the last half of the 1990s; sales were strong. Then the bottom fell out, and the channel compressed.
 
Distributors focused on profitability survived and were well-positioned for the several years of strong growth. It’s interesting to note that many economists (as well as General Electric’s CEO at the time, Jeffrey Immelt) predicted a long-term low- or even no-growth environment in 2002. And then most distributors enjoyed the best stretch of growth in their history.

Recovery from the recession, if indeed that’s the proper term for what’s going on today, has turned out to be almost as dangerous and difficult as the recession itself. The traditional down-and-up cycle which distributors by time honored tradition have been programmed to expect just hasn’t happened this time around. Instead of the neat, sharp snap-back of pent-up demand, the re-hirings, the gearing up we’ve been conditioned to look for, there has been little, if any perceptible shift away from the cautious, tight-fisted buying policies evolved in the depths of the recession.