Strategies for Surviving a Slowdown

I don’t know if we are in a recession, but the evidence of a slowdown is inescapable at this point. But don’t give up hope – there are many opportunities out there, as shown by the advice from NAW Executive Summit attendees.

MY TRIP TO THE NAW EXECUTIVE SUMMIT

I attended the NAW Executive Summit last week, which was one of the most successful (and well attended) Summits. I had the privilege of facilitating a panel of top-notch executives (Dave Griffith, Modern Group Ltd; Mark Kramer, Laird Plastics; and Steve Nelson, POOLCORP). You can view their PowerPoint slides online, but the real value came from the informal networking and idea sharing. The presentations provided a superb business-focused platform for many fascinating best practices conversations.

If you attended on Thursday, then you also realized how much fun I had on the panel with my fellow NAW Institute Fellows – Brent Grover, Mike Marks, and Neil Gholson. The always-classy Tom Gale even managed to keep us (somewhat) on topic.

I also want to give a shout out to Ray York for his Chairman’s address, which was both thoughtful and personal. Many of us in the audience also enjoyed the fact that Ray didn’t hide behind a podium. Well done!!

LESSONS ON PREPARING FOR A DOWNTURN

There were hundreds of wholesale distribution executives at the event, so I took the opportunity to find out how they were preparing to make the most of an economic downturn. Here are the six strategy ideas that I heard:

Idea 1: Make Strategic Acquisitions – The other NAW Institute Fellows and I all agreed that acquisition multiples are starting to return to historical ranges, a trend that I discussed eight months ago in Is M&A Peaking?). The current cycle began in 2004, as shown in Exhibit 5-1 of Facing the Forces of Change®: Lead the Way in the Supply Chain. If your company is well-run and has access to capital, then now is the time to approach distressed competitors to discuss the value of a combination.

Idea 2: Improve Employee Productivity (by Spending) – Many wholesale distribution executives told me that they are planning for the long term future of their companies by investing in technology. (Perhaps that’s why I met so many technology vendors at the Summit.) The biggest gains are coming from substituting IT for repetitive human processing activities such as order processing, billing, inventory control, warehouse management, etc. But not all technologies are created equal. For example, I learned this weekend that giant computer-enhanced pigeons will not improve warehouse productivity.

Idea 3: Improve Employee Productivity (by Cutting) –Productivity is measured as Output divided by Input, so a number of executives discussed improving productivity by reducing headcount. Yes, it can be personally painful to make these cuts, especially when a lay off disrupts the lives of people you have known for many years. However, you don’t want to wake up in three years and regret that you didn’t make the tough calls today. One key caveat: No one was planning to make across-the-board cuts before a downturn.

Idea 4: Refocus on Customer Profitability – Not every dollar of sales or gross profit is worth chasing. More than one executive told me about their efforts to move away from a one-size-fits-all service model so as to limit the full suite of value-added services to the most profitable customers only. Some executives are challenging their management team by asking (in my words): “How can we have profitable relationships with the customers that benefit most from working with us?” My advice: Identify your most profitable customers (highest EBIT) and identify why you have a win-win relationship. (Low cost of sales? Low joint transaction costs? High gross margins?)

Idea 5: Diversify Your End-Markets -- One President of an HVAC wholesaler told me that his company had diversified into commercial and industrial segments, so overall sales and profits were up despite a loss of business on the residential new construction. Perhaps that’s cold comfort if you are tied to a single industry, but there’s no time like the present to begin broadening the customer markets that your company serves. See Why Strategy Matters for my discussion of an MRO distributor that successfully reinvented their business with diversification.

Idea 6: Explore Exporting – Related to the diversification idea, I was pleasantly surprised to hear about successes with overseas markets. As I discuss in my 2008 Economic Outlook audio conference, savvy distributors can benefit from the export trend. I even spoke to an executive who is planning to sell his company’s private label product in overseas markets. Cool!

Hopefully, these six ideas can help to jump-start your own planning. In the meantime, I’ll leave you with this limerick to ponder:

A distributor was feeling quite gray;
Because profits were melting away.
Said the consultant, "Don’t fear,
It’ll get better next year.
But please, pay my bill right away.