The economy and the decline of the dollar top the concerns of many (though not all) distributors and manufacturers, according to the latest MDM survey. Here are the key issues that surfaced in the November poll.
As in the past few years, distributors are paying close attention to consolidation trends among suppliers, competitors, end-users and ERP providers, materials costs, sales force development, supplier relationships, recruiting and retaining talent and controlling benefits costs. Private label, foreign competition and global sourcing have also moved front and center.
We also asked consultants in wholesale distribution to share what they see developing. Here are starting points to help plan for 2008.
1. Plan for Economic Uncertainty.
A good number of economists now believe that the U.S. could head into a recession or at least a significant slowdown. Federal Reserve Chairman Ben Bernanke indicated as much, without uttering the ‘R’ word, when he told Congress recently that the economy would get better before it got worse. The economy, Bernanke says, will soon slow noticeably as the housing market continues to fall and financial institutions tighten lending standards.
Regardless of whether we hit a recession or just a major slowdown – or even a minor slowdown as could happen in some sectors – many distributors say they are hunkering down.
One distributor in the MDM survey said: We believe that 2008 is going to be a tight year, so we have been working to shore up and clean up our infrastructure as well as work with some of our slower/lower performing branches. We are also working very hard to ensure that our value proposition is what the market is actually looking for. In leaner years a distributor has to be the one to bring the most value to the market in order to be successful.
Others said they are looking for new manufacturers to represent and products to sell; managing their cash flow; reevaluating their work force; developing long-range strategic plans; pushing inventory responsibility back up the supply chain; cross-training employees; moving to private label; developing a stronger Web presence; and increasing their focus on documenting customer cost savings. "We are working harder on our service business and focusing on industries that are less likely to be hit hard by an economic downturn," one distributor said.
Mike Marks of Indian River Consulting Group (www.ircg.com) says distributors must be light on their feet. "The key is to have developed scenarios in advance to shorten the time required for meaningful response and also to recognize the need for change quickly. … As long as they can react quickly the economy should not be a major concern," he says.
Marks also says when market segments go into recession there are opportunities to make meaningful acquisitions. "Down markets are where strategic buyers gain strength over financial buyers." Brent Grover of Evergreen Consulting (www.evergreenconsultingllc.com) agreed: "2008-2009 may present a perfect opportunity to jump-start growth in market share by initiating a series of small acquisitions at favorable prices."
Marks says a down market is also an opportunity to pick up a stronger line. "Distributors should always have a secret list that describes their All-Star line card. Market turns are a great time to go out and network with key suppliers you would like to represent."
A downturn is also an opportunity to acquire talent from competitors who would not normally be available, Marks says. Still, a distributor that is hurting will need to reorganize their sales force, especially if they are on a commission program. "Making everyone bleed a little puts their high performers at
risk while the low performers just don't work as hard," he says. "Reducing staff and reassigning vacated accounts is a great way to keep high performers whole during the down part of the economic cycle."
2. Draw Good People.
The retention and recruitment of talent was mentioned by nearly everyone in the MDM survey. The Industrial Careers Pathway, an initiative focused on recruiting students into ID programs and careers, reports that its mission is challenged by global competition, the fact a significant percentage of the work force is set to retire soon, a lack of awareness of this industry and a "broad misperception" of industrial careers.
Nancye Combs, human resources consultant (www.hrenterprise.com), says employers must work to be an attractive employer. "The lack of technical employees has reached a crisis state in some distribution market segments," she says. "Employers must become proactive in training their own. Investment in training is essential. Tuition reimbursement is now a standard practice."
Smart management of compensation is key to retention – whether the economy is up or down.
"Compensation remains the No. 1 reason employees leave their jobs. In spite of changes in the economy, talented knowledge workers (sales, IT, logistics) are in demand and there is a shortage of technicians & hellip; Casual management of compensation, without the knowledge of how to gain the most benefit from the compensation investment, is a waste of millions of dollars and gives little return to the distributor."
The keys: reputation, location, compensation and opportunity to grow. Improving the hiring process is the first major step to retaining employees, she says, and market-based compensation, including benefits, is essential. "However, employees work for people and poorly trained managers and supervisors undermine all of the company's best efforts and hard work in finding the best employees."
As many distributors and manufacturers have learned though, recruiting and retaining good people is easier said than done. "The advice given to managers as the key to success is to hire " good people.'I wish it were that simple," says Jim Ambrose, a consultant who focuses on branch management (www.branchmanagerceo.com). "Just go to goodpeople.com and choose a few to hire? It does not work that way. The answer is in developing good managers. A manager with strong business and leadership skills develops good people and attracts the best people."
3. Strengthen Services.
Nearly 60 percent of those who took the MDM survey said they were not relying more on services as a revenue source than three years ago. Those who are are looking at ways of improving their customers'productivity. More customers are looking to outsource traditional functions, and some distributors have grown smarter about charging for services.
"We charge for services we used to give away as part of large orders -for start-up assistance for example," one distributor said. "We charge much more for service now. Customers who have cut staff are willing to pay."
Other service-based moves by distributors described in the survey: inventory management; onsite job trailers; onsite diagnostics of fluid power systems; procurement services; safety services and training; equipment repairs and rentals; coolant maintenance and support; kitting; reconditioning of personal safety equipment; and a video-training-on-demand service for end-users.
One manufacturer says his company is trying to work more with channel partners: "We continue to add our own sales force and provide more distributor and end-user training sessions than in the past. This helps us bring to the forefront what our company has to offer."
What is your value proposition? Bruce Merrifield of Merrifield Consulting (www.merrifield.com) asks. Visit your top 10 accounts, or those with the potential to generate about 80 percent of future profit growth. At those accounts, do a "total value-creation audit" in which team members "staple themselves to both the paperwork and product" as it flows through the customer's facilities. Looks for points of confusion, hassle, fumbles, bottlenecks, down-time and under-utilization, Merrifield says.
Follow up with a report that offers ways to change how you work with the account and its employees to solve problems. Focus on lowering total procurement cost for product you supply them; maximize their up-time and on-time effectiveness; and/or lower their total cost of ownership.
"These process solutions cannot be identified, sold or implemented effectively by the sales rep who happens to be on the account," Merrifield says. "This is a honcho-to-honcho process re-engineering, co-creation challenge that requires a team implementation follow-up that will involve custom, one-off service solutions.
4. React to Global Trends.
More distributors and manufacturers are seeing impacts from beyond North American borders, including exchange rate fluctuations and commodity price trends. Distributors are importing more products directly, though it can be tough to find reliable sources overseas.
Counterfeit products are making their way into North American and European markets, creating not only a safety issue for end-users but a brand-protection issue for manufacturers and distributors in all industries. "Grey market issues are re-emerging as the Internet connects buyers and sellers," says one survey respondent. One manufacturer says some end-users are importing safety products themselves and have hired a distributor to manage the process.
If you are doing business overseas, or plan to, one company recommends preparing yourself and your employees for currency, credit, language and freight issues. Freight costs are going up, some said, due largely to high oil prices.
"Distributors that partner with manufacturers in China must escalate their understanding of the cultural differences to avoid the issues associated with product quality and timely delivery," Combs says. ; "Many American business ; people remain naive in conducting business globally. ; Few manufacturing sources in Southeast Asia understand the highly competitive and scrutinizing nature of how business is done in America."
Globally, distributors should consider whether there are opportunities, especially in emerging economies in Eastern Europe and Asia, but in doing so they must pinpoint how they can add value to that supply chain. Consider this: Many manufacturers who have developed a presence in other countries say that distribution in emerging countries doesn't always make sense. One survey respondent said: "We are looking at costs and what channels we should use in emerging countries, and we decided that we should go direct in several countries."
5. Hone Pricing.
As detailed in a recent MDM audio conference, strategic pricing is the next frontier for distributors and manufacturers to cross.
""Our partners are advising most of our distributor clients to focus on strategic pricing as their No. 1 priority for 2008. Pricing is the last unplowed field for most companies," Grover says.
"Salespeople are overwhelmed with the challenges of managing the pricing for their customers. The chaos of distributor pricing begs for a simple, elegant solution. We have found that there is at least a first-year 200 basis-point potential (2 percent gross margin increase) for most distributors."
During the MDM audio conference, Marks spoke about going back to the beginning to audit your current pricing process, and moving forward from there. Pricing should not be left to the sales force, he says.
"When you talk about changing the rules, it is about creating a pricing policy that is subordinate to a pricing strategy, and it's been our experience that most folks don't have that," Marks says. "When they have problems with pricing they just get a sharper pencil, and that's pretty much where it stops."
6. Develop Your Sales Force.
"The selling relationship has changed dramatically,"" Combs says. "Those who sell to a small, intimate group, with long-standing relationships, should be okay for the foreseeable future, but those who sell to the big box stores and other large customers should already be aware that old-time relationship selling ; is 'out the window.'
"The new ; buyer profile ; is a recent MBA who is driven by climbing the corporate ladder and may know little about the products he/she is buying. "In this case, results are the goal, in the form of price, timely delivery and value-added services.
Todd Youngblood of YPS Group (www.ypsgroup.com) says now is the time for distributors to increase accountability in their sales force. "Measure each of your sales reps in terms of how well and how often he or she executes each of your most critical sales activities," he says.
Identify which sales activities are truly critical to producing sales and margin, identify the best-performing rep for each critical sales activity; publicly post the performance numbers for each activity (not necessarily with names); and dedicate at least 30 minutes of each monthly sales meeting for training on how to better execute one of the critical sales activities.
This training should be conducted by your own sales reps, Youngblood says.
In addition, distributors should implement a "robust CRM system," says Youngblood. "Until the 'Opportunity Management' functions of your CRM system are regularly used by the entire sales team, the measurement and analysis described above is impossible."
In addition to improving accountability, Youngblood says distributors must hammer home the importance of a compelling value proposition: "Price, availability, product features, service and reputation do not qualify as components of a compelling value proposition. They do qualify as components of a value proposition that is essentially identical to that of every competitor out there. At a minimum, a compelling value proposition includes: a statement of how one or more customer business processes are improved, and quantification in money terms of the value of that business process improvement."
7. Maximize the Technology Available.
As former Prophet 21 executive Doug Levin told MDM recently, distributors should make sure they are using all of the functions of their current IT package before buying a new one.
"Investigate the cost of getting your existing technology to do something that you might think, ' I need to buy a whole new system to get that 'because it probably will be less expensive to take your existing technology and make it do what you want he says.
Marks agrees: "One strong payoff for most distributors would be to identify a critical constraint or recurring problem in their order process and dive into their existing package to see how it can be used to fix the problem."
If you have never looked at updating your technology do an audit of your current systems and needs and research your options. The industry is changing.
Some options have become more affordable for smaller distributors.
8. Build Strength & Productivity at Branches.
Ambrose says it is essential that distributors push for productivity improvements at the branch level. ;
"There are a lot of busy people at branches doing a lot of 'stuff' every day in order for the business to provide value to the customer. But are all these people doing the right things for the right customers? How much of what they are doing is caused by internal impediments? How much of what they are doing is for the wrong customers? My data suggests it is a lot."
Ambrose says each branch manager should create a specific vision for his branch based on market space, market share and key customers and then focus activity around that vision.