THE OUTLOOK FOR 2006
The past few years have delivered a long-awaited turnaround for the wholesale distribution industry. The United States continues to expand at a sustainable rate. In 2005, Pembroke Consulting estimates that total sales of wholesaler-distributors will reach nearly $3.6 trillion, representing a 7% increase over 2004. Pembroke Consulting forecasts continued growth in 2006, with industry revenues growing by 6.5%.
In this article, I highlight four of the many strategies contained in the all-new “OUTLOOK 2006” report, an interim update on the key trends identified in our industry trends report “Facing the Forces of Change: The Road to Opportunity.” (Both reports are available online from NAW/DREF at www.nawpubs.org.)
Grow profitably in a favorable economy.Distribution managers must understand the true operating profitability of their customers to take advantage of the favorable economic growth environment. Profitable growth requires a ruthless focus on the right customers and tight limits over the resources used to support unprofitable accounts.
Stop trying to indiscriminately acquire customers simply to spread the fixed costs of operations. Instead, focus on retaining and growing with your most valuable customers. The current economic environment is also ideal for recalibrating business processes to remove the unneeded capacity from their organizations. Understand how your company really makes money and recognize that nearly all fixed costs can be considered variable over time.
This year, try to stop giving unprofitable accounts access to the same service bundle as your most profitable accounts. Customer profitability analysis can pinpoint the most profitable accounts - the ones who must be protected at all costs. Innovative services for these most important customers are an ideal way to strengthen those relationships. Without customer profitability information in hand, a distributor will devote precious capital to creating new services for customers who are already costing them money.
Prepare for a graceful exit.Financial buyers are displaying a far greater ability and willingness to pay premium prices for leading distribution companies. They are being attracted by the ongoing need for wholesale distribution to end-markets insulated from global competition, such as facilities maintenance, construction, or health care services.
In many cases, financial buyers now often pay equal or higher purchase prices and purchase price multiples than strategic buyers such as large distribution companies. This trend will play out over the next few years because there is approximately $100 billion of uninvested capital available to financial buyers, which represents at least $400 billion in buying power at current leverage multiples.
Many distribution owners must be prepared to change their businesses if they want to take advantage of this trend and be viewed as an attractive acquisition target by a financial buyer. These buyers purchase private companies as an investment and therefore look at the potential return that a company can generate over a four to six year holding period. A distributor at the end of its lifecycle is only worth its assets.
In general, financial buyers are looking for well-run companies that provide value-added services, have solid management teams, capable information technology (IT) systems, thorough training programs, defensible market positions, stable cash flows, and multiple growth opportunities (i.e., both organic and via acquisitions). They also expect the current operating management team to remain and grow the business.
If you are considering a strategic transaction, use 2006 to examine your business and determine whether it has the necessary attributes (e.g., management, cash flows, growth opportunities, etc.) to command a premium valuation. To make sure you do not over-improve the business prior to a transaction, measure the expected costs to optimize your business vs. the anticipated enhancement to business valuation.
Build leaner supplier relationships.Many manufacturing executives credit 2005's manufacturing turnaround to Lean Manufacturing initiatives. A recent Industry Week/ Manufacturing Performance Institute survey found that nearly 80% of manufacturers are deploying continuous-improvement methodologies, such as Lean Manufacturing, Total Quality Management, or Six Sigma. Motivated distributors can use this turnaround to work with lean-focused manufacturers to find a common ground for reducing costs and raising productivity.
At its core, Lean Manufacturing involves a detailed review of production processes to find redundant, unproductive, and wasteful practices. Lean techniques are now being applied to other competencies, including marketing, sales, and research and development. Customers are also making the extension of lean efforts mandatory through aggressive buying tactics, such as strategic sourcing and labor-only contracting.
Joint lean initiatives will make a channel partnership more productive and lead to win/win results. Distributors will spend less time trying to create the appearance that manufacturers' sales and marketing plans are core to the distributors' own strategies. Manufacturers will be relieved to learn that supply chain improvements can offer economic benefits to distributors, thereby offsetting the need to always offer discounts and rebates as incentives to distributors.
Distribution executives should learn about Lean Manufacturing by reading the literature, searching the term online with your manufacturer's company name, and/or attending a conference. Then, identify which of your suppliers have robust, effective Lean Manufacturing programs and find out if they are interested in extending their efforts to collaborate on supply chain improvements.
Upgrade your sales force.“Facing the Forces of Change: The Road to Opportunity” highlights the risks facing the quality and effectiveness of a distributor's sales force. A growing portion of the customer base finds little value in the traditional sales call made by the traditional salesperson. As customers move away from spending time with salespeople, the salespeople will find themselves with fewer customers on which to call. Salespeople will confront customers who have many alternate sales methodologies, including e-commerce and proactive inside sales.
Salespeople must become more professional and more highly skilled in consultative selling. The days when success at distributor selling consisted of pitching a price and becoming the customer's lapdog are coming rapidly to an end. Salespeople will need to become skilled at bringing real value to customers every time they spend time with them.
To get ready for these changes, distribution executives should focus on improving the productivity of outside salespeople. Automation can help salespeople devote less time to tasks contributing to their main objective of driving revenue and profits through selling. E-mail and electronic reporting should cut down on the time salespeople spend on repetitive tasks. Routine administrative activities, such as following up on sales credits, can be automated. Wireless handheld devices provide salespeople with the ability to access information, answer questions, or retrieve customer information throughout the sales day.
In 2006, make sure each salesperson is comfortable selling through new technologies and can teach customers how to gain information, place an order, or solve simple problems themselves. For example, your sales rep should be able to teach customers how to access your company's Web site for product information, special marketing promotions, and account information.
The coming year offers a good opportunity for distributors to build on three realities of efficient supply chains:
- Supply chain inventories and customer service levels cannot be maximized unless suppliers and distributors cooperate.
- Manufacturers skilled in lean techniques have competencies useful to distributors and may invest in change if distributors agree to follow through.
- By upgrading the channel management dialogue to include operational gains, manufacturers will identify new opportunities simply because new questions are asked.
Action Steps For 2006Today, wholesaler-distributors are benefiting from positive economic growth trends and a business-friendly political environment. Use the new OUTLOOK 2006 book during this period of economic growth to invest in strategic options that will benefit your company for the long run. Understand which strategic action steps make sense for your company to implement in the near term and which action steps you can address later.
The next edition of Facing the Forces of Change will be released in 2007. Between now and then, make an effort to get your company on the road to renewed relevance and increased profits. By responding to the forces of change with innovative strategies, wholesaler-distributors can successfully reach new paths to profitability, growth, and customer satisfaction.