The esteemed American Economic Association, composed of the country’s best economists, met recently and issued their forecast for the next decade. The consensus view of lower than average growth for the next decade should come as no surprise. The growth will average around 2% which is well below other years where 3% plus averages are not uncommon.
Understand that the average is for a decade and there will be some good years and slow years. Specifically, on the rebound, expect 2010 to 2015, to be good years and, after that, according to the forecast, a slowdown. In the slow growth environment, if wholesalers want to grow their firm, they will have to outperform their competition. And they will have to do it while giving the customer consistent, well defined value, at a good price.
In a commodity industry where growth is slow, the need for streamlining the organization is prescient and doing this while doing things faster, better, and less expensively is a real challenge. No longer will growth be assured by placing a warm body in a slot while hyping them on the company’s history and products. Wholesaling is full of lifestyle owner/operators who often work to schedules of their own calling, build vacation homes, have country club memberships, and enjoy the good life as the business supports the lifestyle. This observation is not meant to be insulting as there is nothing wrong with running a lifestyle business if you can afford it.
However, the future environment doesn’t allow for waste and excess, and anyone who believes that it does will be in for a shock. Owner/operators will work longer hours or trim their personal income and shift it to hiring more capable managers who can do faster, better, and less expensive more efficiently than the sales guy-turned-manager model that dominates many companies. In my estimation, there will need to be an upgrading of the functional capabilities of many wholesalers as they grow through consolidation or through the failure of small guys and over-leveraged super-large companies. And nowhere will the upgrading and streamlining of headcount be more evident than in the position of branch manager.
Central to streamlining the firm is knowing who, what, and how many line and staff managers the firm needs. The decision process for understanding how to staff the middle and upper echelons is never easy and it comes with a lot of trial and error. There are few things, however, that will plague the owner/operator in the next decade than how to staff the middle and upper level areas of the firm. The debate of staff, in my view, will concentrate on the role of the branch manager and what he/she is expected to do. And, in many instances, the position may not be needed at all with many of the duties going to other positions.
The branch manager is an old and revered position dating back to the days when the place function and local market knowledge and relationships were central to the operation of the corporation. These variables are still important, but they are not, in my view, as important as they were in years past. Why? Since wholesaling is an uber-mature business with better, more pervasive, and easily accessed knowledge of products, service, and pricing, the need to inspect their quality and profitability, at the local market level is lessened. In years past, the branch manager handled pricing, sales management, billing, collections, operations, hiring and firing and other functions.
However, many of these functions have become more complex both as the firm has grown and as customers demand more. How practical and profitable is it to have a branch manager handle the pricing, sales management, billing, collections, operations, hiring and firing and other functions? My own view, for the growing wholesale firm, especially once the company gets 50MM or more in revenues is that, to do the knowledge well, the firm needs to have a centralized expert in these areas and rely less on the local manager to handle these functions.
This does not mean that there doesn’t need to be training on these subjects and proper procedures on these functions for the operators of the local market. But having these functions controlled by the local manager, for a larger firm is dangerous. Why? There are simply too many interpretations of what is right or wrong and the firm customizes by the local market or, God forbid, by every account. The result of this individual customization is a firm whose operating costs can’t be sustained or, worse yet, branch managers and sellers who promise services whose costs outrun the margin dollars of the account. There is a lot of “customization on steroids” in distribution and it’s in large measure not sustainable.
I realize that this type of logic goes against the grain of history in distribution but consider the following subject areas and what is cutting edge in distribution knowledge and see if your branch manager can give you proper definitions by function.
Pricing- Segmented pricing, transaction based pricing, behavioral pricing, cost to serve implications of pricing, list pricing management, service pricing and cost-recovery pricing.
Solicitation and Sales Management- Account balancing, boundary setting, matching solicitation models to segment dynamics, comfort zone matching, and matching compensation models to the segment strategy.
Service Operations- Service quality measurement, streamlining service processes, limiting service promises, cost to serve analyses and their implications.
I find many wholesaler branch managers and even executives who can’t define these areas of knowledge and yet they are central to operating a modern-day distribution firm. I’ve researched and consulted on them for a decade and, when properly applied, they work.
The Research and New Management ModelsIn late 2007, I did research on the future of the branch manager for a major distribution industry. The upshot of the work was that the industry that covered industrial, contractor, institutional, and government markets is that the majority of these firms expected that the branch manager handle all these functions in the future as they had in the past. It is no surprise to me that the industry’s performance has lagged that of many other sectors and there are too many wholesalers who, to borrow from a former blog entry, compete for pennies of profit while whacking each other with Nerf bats in a dark room.
It is simply not practical and recommended for any one person to manage pricing, solicitation and sales management, and operation management. Why? The knowledge is too complex and there is only so much one person can and should be expected to do. In response to this, some few wholesalers, have taken the bull by the horns and done the following:
Define and centralize core functions including pricing, solicitation
management, operations, and human resources.
the corporation with qualified managers with experience and formal education
while charging them with fully developing the functions and educating firm
members on the proper procedures, rules and regulations.
- Rationalize the branch manager model with hybrid structures including regional managers with office managers at the branch level. The overall cost to the firm is less as branch managers are replaced by better process knowledge and procedures while reducing the need for a manager at every branch.
This line of thinking is, for many in the grand business of wholesaling, unpopular. Branch managers helped build the business and the position can still be a valuable part of the firm. But asking the branch manager to do all things at the local level, without functional specialization at the corporate office, is a model that won’t make it in tomorrow’s economy of slow growth and cost sensitivity.
I hope in the future to see more streamlined distribution firms with process experts at corporate and well documented implementation of their recommendations at the local level. I am not too excited about wholesalers who push all the decision-making to the local level and expect superior profits. They are a vestige of the past and their future is not so assured as it was in dad’s and granddad’s generation.