Why the Trend is Your Friend - Modern Distribution Management

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Why the Trend is Your Friend

By tracking trends, it's possible to match expenses and cost-to-serve with the business, without fuss or emotions.

One of the most important recent trends is the accelerated interest and involvement of private equity investors in wholesale distribution. Stuart Mechlin's blog on mdm.com focuses on thinking differently by using a Private Equity Investor Framework. He recommends distributors think more like investors to add value to their businesses.

A number of years ago I spent two weeks on the foreign-exchange desk of a major money center bank. It was a period of sovereign debt crisis overseas, high inflation (1000 percent+) countries (and you think we have problems?), and new untested domestic and international global financial instruments. It was a high-risk, high-reward environment and a fertile learning ground.

Among the many lessons learned during this period, my favorite and most useful was: “The trend is your friend.” Also useful was the lesson of “trading ranges” – the spread between the highs and lows of any data points over a period of time. These are familiar phrases to anyone who has had experience in financial or commodity markets. A trend in this instance is defined as something that breaks out of the norm or trading range, indicating a solid shift.

Data points in time indicate a real trend either up or down less than half of the time. By tracking trends, we can do a better job matching our expenses and cost-to-serve with the business, without fuss or emotions. We don’t kid ourselves that what we want to be a trend really isn't and, conversely, what are real trends that demand additional resources or consideration.

Recent year-end sales reports for distributors were a good example of looking beyond just a point in time. The sales volatility caused by uncertainty at the end of 2012 caused sales to drop in December, but they were still within a trading range – which subsequent months have proven out. But some distributors looked at the drop and instead of tracking the broader trend,may have hit the panic button and started initiatives that they have since undone as sales have climbed again.

The concepts of trading range and tracking trends feed analysis that investors use to manage and produce superior returns. And it is an additional decision-making tool that owner-operators and managers of distribution companies should be learning and using for additional value creation. It is one of the important data-centric tools that act as a counterweight to the dominant product- and sales-centric approaches, all too common in distribution.

Most managers look at numbers at a discrete point in time. There may be comparisons to prior periods, whether that is week-over-week or year-over year. You may also be doing projections about the future – primarily in the form of budgets – and tracking whether they were met, missed or surpassed.

But thinking in terms of trends requires tools that encourage engagement, rather thanprimarily working off of tools of record for decisions.

The idea that the trend is your friend is not about the trend going the way you want it to go, or confirming your forecast. Rather, like a good friend, trends tell you what you need to hear and not just what you want to hear. Tracking trends gives us an added dimension beyond the point-in-time snapshot.

When we track trends and trading ranges, we can adjust quicker. We can start moves earlier and delay moves that prove to be unwarranted.

One of the most respected economic trend analysis firms in distribution is ITR Economics, led by brothers Alan and Brian Beaulieu, who are frequently featured at distribution industry events. Every graph and chart they provide shows trends and trading ranges, as well as rolling averages. Every subject or slide shows what that particular trend subject means for you. Most of us attend these presentations and read their reports with rapt attention. On a macroeconomic level we discover how the world has worked, how it is working and what the prognosis is – and most importantly how we should respond for the best chances of success.

Use the ITR economic trends reports as comparisons and background for your own business metrics and segments. Are you leading or following? Why? You should also use the MDM distribution trend articles and recent webcast, Top 10 Trends in Distribution in 2013. If one of the trends applies to you, ask the same question: Where do you stand?

Unfortunately, it’s rare to see this idea applied on the operating level of a distribution company. When distributors bring this idea down to the firm level, it can reward them with competitive advantage by creating additional value.

Here are some examples:

1. With new business segments develop a trading range for the year as opposed to a snapshot approach. (Brent Grover’s new book on strategic planning, published by MDM, has some excellent best-, base-, and worst-case (anothername for trading range) techniques to do just this.)

2. Choose some key internal business metrics and develop a trading range both in the previous 12 months, as well as the next 12 months.

3. Develop a net profit trading range for your top customers. Track closely and note any improvement or erosion of this range into a trend. What action or even inaction will this dynamic metric, as opposed to the static snapshot, tell us to take?

4. Develop trigger points for action or corresponding inaction based on where periodic data (daily, weekly, and monthly, quarterly) falls on the trading range for the above.

5. Consider trends when you make cost-to-serve decisions, acquisition decisions, geographic decisions and other growth and profit decisions. The main purpose of a growth initiative is to create a trend out of a trading range. Set your expected performance before you make an investment. To motivate employees, incentivize real trends – and not just performance that could be considered part of your average trading ranges.

This process is not about having four computer screens on your desk connected to a real-time Bloomberg newswire.

Your controllers and CFOs can track trends and develop trading ranges. Whether from their financial peers and colleagues or from public, Internet sources there are excellent how-tos – simple to complicated – to develop a dashboard that works for your situation.

In fact I suspect that your financial staff would welcome the challenge to create additional tools of engagement rather than always working on tools of record.

Regardless of what best practice example you learn from, it's a matter of applying an already invented wheel to your operating discipline. It’s about starting with and tracking trends for a few metrics, learning what works and building from there.

After 18 years in the wholesale distribution industry, including the role of senior vice president of Affiliated Distributors’ Industrial Supply Division, Stuart Mechlin is actively engaged in working with distributors, suppliers and technology companies on growth, marketing and profitability strategy/tactics. He is a member of several wholesale distribution company boards of directors. He has worked in such varied management roles as sales, finance, international J-Vs, purchasing and distribution for several public and privately held best-practice companies. Mechlin is also a member of MDM's Editorial Advisory Board. Contact him at stuart.mechlin@gmail.com or connect at www.linkedin.com/in/stuartmechlin.

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