Different tactics for a different type of downturn

by D. Bruce Merrifield Jr.

Where is the recovery for the current economic downturn? Some distributors are in channels that have already been in recession for a year. Most other channels are now in the same boat. Distributors with significant debt saw their operating profit hammered by higher interest rates throughout 2000. They are now getting interest rate expense relief due to the Fed’s interest rate cuts since January, but those “new” savings may only cover huge increases in medical insurance premiums this year. And, forecasts for a recovery keep being adjusted further in to the future.

The V-shaped recovery that the average economist was forecasting in January to start in June has been postponed first to the fall and now to the fourth quarter. The ongoing effects of deflating the biggest stock market bubble in history as well as digesting the biggest excess capital expenditure overhang since the railroad bust in 1870 seem to be causing an L-shaped non-recovery.

Will L-shaped recession strategy measures be any different than those for past recessions? Most distributors have already pushed the routine recession buttons - freeze hiring and wages, stop all discretionary spending, expect incentive pay to drop and wait for the recovery. Some smarter, more proactive firms may be doing some strategic downsizing of unprofitable customers, products and employees.  But, maybe this time around a prolonged slump and weak recovery will force many firms to rethink their flawed, unspoken operating assumptions and address their biggest, in-denial profitability problems?

“Excuse me, Bruce – flawed assumptions and in-denial problems?”

Yes!  Here are some reality-check statistics followed by some tough questions for the 90 percent of all distributors that aren’t in the top 10-percentile, financial performer category.

IDA's "2000 Profit Report" indictment
In 1999, before the current recession hit, the median IDA distributor had gross margins of 24.8 percent, a profit before tax margin of 1.6 percent and a pre-tax return on net worth of 10.6 percent. The top 10-percentile companies, 14 out of 142 firms reporting, had the following average statistics: 32 percent gross margins, 7.7 percent PBT and 61.5 percent pre-tax return on net worth. The median distributor had $8 million in sales, the top 10 percent had $11 million, a sales volume difference that cannot account for five to six times better profitability rates!

What could the top 10 percent be doing differently?
1. They are obviously “selling higher” with a 32 percent gross margin rate which would suggest that they have figured out how to measure, achieve, sell and get paid for basic service brilliance while most of the other 90 percent haven’t. The rest appear to be price-takers. Neither they nor their customers are convinced that they have a better total service value to offer at a higher comparative price than a mediocre service competitor.

2. Perhaps the rest are still making 20 to 70 errors per 1000 line items processed in the warehouse which would give them higher operating costs, lower service value and lower morale. Remember Phil Crosby’s “Quality is Free” book from 1979? He estimated that the average service firm spent 40 percent of the total payroll cost on “non-compliance” activities, a euphemism for mistakes. The top 10 percent have probably figured out how to achieve do-it-right-the-first-time economics.

3. The top 10 percent can’t be selling big, money-losing contracts at low margins to have a 32 percent average gross margin. Why haven’t the bottom 90 percent figured out how to measure customer profitability and then have the courage to tell losing customers that the relationship must be win-win (profitable to the company) or the customer must leave to paralyze the other 90 percent of the competitors who don’t know any better? Better to lay off the least productive employees in parallel with driving away losing volume activity. Then, a smaller, better executing and more profitable business can serve as a platform for the right kind of growth. Be everything to somebody instead of selling a little bit of everything to everybody.

4. A company can’t achieve, sell and get paid for distinctive service excellence if all the employees don’t have their hearts, minds and wallets wired into the high performance cause.

For more information, contact Merrifield Consulting Group Inc. at http://www.merrifield.com. 

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