After a forest fire, only the strongest trees remain alive. In
business language, the economic "bubble" burst, went flat and there you are,
right where you started before the bubble inflated. You're also left with a lot
of dead stuff you need to get rid of and turn into some cash. And as long as
you need to rebuild some processes, why not rebuild them so you can operate
with minimum staffing?
To make the most profit as soon as possible, it is best to
launch productivity and growth initiatives simultaneously. But when assets and
productivity are in tough shape, you need to get the army's "rear elements" in
order. That's directly from Sun-Tzu's "The Art of War", and we dare not
question the master's wisdom.
We will discuss how
to see growth opportunities in a whole new framework in the next article. For
now, let's generate some cash and productivity.
Dealing with A Sudden
Change in Velocity
Booms increase the velocity of business, increasing the pace
and productivity of your salespeople, inventory, receivables, delivery vehicles
and warehouse investment. This stimulates asset turnover and people
productivity. Few distributors take care to stir up slow moving inventory, receivables,
SPA credit lags or people productivity in a boom period. Underlying weaknesses
hide.
When things slow down, marginally profitable salespeople
become grossly unprofitable. Some "A" items become "B" items. Some C Items
become dead items. Customers that pay in 30 days pay in 60 days. Suppliers issue
SPA credits more slowly. They also accept fewer returns, approve fewer items,
and enforce the fine print to the letter.
You probably didn't stay vigilant by stirring up slower
moving assets and improving productivity during the boom. Increased velocity
made things good enough. A decrease in velocity is ugly, though. You get stuck
with more dollars in slower velocity brackets. People productivity plummets from
reduced demand. You wish for the boom days again. But growth could kill you from
the increased cash requirements and the banker's windows are closed up tight
this time.
The Starting Point:
Cash and Productivity
If you're on credit hold, having trouble-making payroll or skipped
a paycheck to yourself lately, you're in a cash crisis. You need to immediately take action to
generate cash before doing anything else.
If you're in great shape with asset turns and productivity,
you could probably stand a tune-up while simultaneously discovering new growth
opportunities. Nevertheless, let's take Sun Tzu's advice and start with cash
generation and productivity.
The Great Eight Productivity
Drivers
1. Increase The Speed
of SPA (Rebate) Collections
If you do a significant amount of business requiring SPAs,
such as 30% of Sales at an average 40% or more discount from book prices, and
you claim manually, this could be the single biggest source of uncollected cash
in your entire company. The symptoms won't directly show up in your PAR report
or financial ratios, either, so don't look there. Think about it. You claim
once a month, and that's a 16-day average lag. You submit manually, so
manufacturers must process manually. That takes another 60 days for a total of
76 days. You can short circuit this whole lag to six days by cleaning up your
product data, matching it to the manufacturer's, making sure you entered your
SPA prices correctly, and claiming electronically once per week with your
manufacturer and get paid a few days later. The result? Depending on how much
SPA volume and the depth of the discount, you could generate anywhere from 1 to
7% of revenues in instant cash. Is it worth the effort?
2. Increase The
Velocity of Current Assets
The Problem With
Inventory: Think of current
assets like a pond fed by a spring. The spring slows down. Some areas of the
pond don't get agitated: they die. Everything else is less agitated and slows
down, slipping a bracket or two. A's become B's, C's become Dead, etc. Your mix
of inventory now contains 50% or more dollars of slow moving items vs A and B
items, which self-adjust with reduced purchasing activity. The dead don't move.
The Solution: Use
your business system to report how much you have in each velocity bracket in
dollars to shock yourself to attention. Then start computing days of inventory
and dollars by unit in those brackets. Consider anything without a sale for six
months as possible dead items for removal. You can organize returns for some
inventory that is returnable. You can auction off other items that are truly
dead to generate cash if you're really in a crisis. Finally, you can write
things off and save taxes if you're in the black. The worst thing to do with a
lot of dead and near dead items? Nothing.
The Problem with
Receivables: Most distributors stay on top of this one better. But the
problem is the same. Reduced demand diminishes ability to pay, and payers slip into
lower performing brackets. You have to stir up "the pond" to stimulate life and
more cash. Use your business system's aging reports to manage this as usual. No
rocket science here. But you do need to guard against an increasingly more
common trick. Some businesses wait until you yell, like 60 days past due. Then
they pay with a credit card. Your fees go up, and combined with the cost of
money on the 60 days, wipe out your meager net profit. You might as well flag
the customers that do this, and get them on credit card to begin with. At least
you get the cash up front.
3. Increase
Productivity of the Back Room
a. Purchasing
No purchasing agent can outperform a computer's ability to
generate stock replenishment orders and manage inventory. But many purchasing
managers are not entrusted with managing inventory. That's a problem.
Another problem is that purchasing managers don't understand
how different purchasing models work: EOQ, Min-Max with Order Points and SCM
models. Your business system's consultants can teach your people to use these
methods in appropriate situations. It can also reduce the number of people
required. Purchasing managers can handle more suppliers and generate more line
items per person per year. Switch to generating automatic replenishment orders
electronically using EDI or similar methods and you can reduce purchasing
personnel up to 75% while increasing customer service levels.
b. Automate the
Warehouse with Wireless Handheld receiving, stocking and picking
The best measure of logistical efficiency is cost per line
item delivered. Receiving, stocking and picking are the lion's share of that.
You can increase efficiency by managing shifts and using wireless technology to
receive, stock and pick items. Wireless warehouse management and bar code
utilization reduces the "warehouse walk" while reducing put up and picking
errors as well. Depending on your size and sophistication today, you can affect
20 to 40% reduction in warehouse force, and you don't need people with a deep
and broad product background any more. All that spells dramatically lower
warehouse costs.
c. Do The Three-Way
Match in Accounts Payable
If you did your homework cleaning up your data and syncing
to manufacturer data, you're almost ready for a miracle. If you sent your
orders EDI, obtained an electronic receiving document EDI, and an invoice via
EDI, you can set tolerances for errors on invoices before involving a clerk to
fix them. The computer looks at all the line items for price, quantity and item
errors and omissions. For example: don't even look at an invoice unless errors
are more than $75.00 total or .5% of the invoice total. Why? It probably costs
$75.00 to look at an invoice and fix it manually. You just pay all the other
invoices via electronic funds transfer or an outside payment service. The
computer checks them, not your clerk. This can reduce personnel costs up to
75%.
d. Drive Invoicing
and Accounts Receivable Productivity
What's the best way to send invoices through the mail? Don't
do it. That's labor that either somebody else could perform more cheaply, or
not perform at all. You can bill using email manually. You can also bolt on
payment systems that save customer billing preferences such as pay by invoice
online via ACH draft, email invoice, or pay by statement online with ACH draft.
BillTrust is one proven solution. Let the computer do the work unless you've
got outstanding invoices and need to intervene. Wouldn't you like to allocate personnel
to making collections vs sending invoices?
4. Drive Pricing
Productivity
Part of your market identity is perceived price level.
Normally, you are perceived as the low price player, a competitive player, or a
high price / high service player. There's not a lot of room for the third
category today except as a niche player. You need to be competitive on the
right items or you're out of the game. But which items? That's one problem.
Another problem is velocity slippage. If the relative
investment increases for an item because the volume decreased, you need to
increase the price to compensate in order to hit target return on investment.
So think about this: if you're going to be smaller for a while, your turns will
naturally slip and relative investment will rise. That means your overall Gross
Margin Percentage needs to increase to hit ROI targets. If you need to be
competitive on certain items more than ever today, on which items should you
increase?
Solution: Determine
your Everyday Low Price (EDLP) items. Follow the market daily on these and
adjust your price tactically. Look at B, C and D items carefully for
opportunities to raise prices incrementally to affect the overall gross profit
percentage increase you need for the higher relative inventory investment.
Another problem is failing to increase prices as soon as
manufacturers raise theirs. If you want to have enough cash to handle the next
incoming shipment, you need to increase prices promptly.
5. Drive Sales Productivity
The recession slowed things down. It made marginally
profitable salespeople unprofitable. Though most companies measure sales
totals, sales variances, gross profit percentages and the like, they are
woefully incomplete measures of sales forces. You need to measure Return on
Sales Expense by computing a ratio of gross profit dollars generated vs sales
expenses. Total up salaries, commissions, bonuses, training, insurance,
benefits, car expense, travel and living and any other expenses you pay on
behalf of sales people. Do this for each salesperson, each sales force, each
region and for the whole company. Take action on performance issues.
Inside salespeople don't have discretion to spend money, so measure
their output: lines items produced per period per person. You can also measure
gross profit percentage, especially on nonstock items, where there is a strong
tendency to price things low because salespeople think carrying costs are low.
This ignores costs of returns, which can exceed $60.00 per event. Keep nonstock
Gross Profit levels at 30% or more.
Counter people can make or break counter profitability with
tie-in selling. Gauge this with the average number of line items per order. You
might even reward for performance increases in this measure to drive tie-in
selling behavior.
6. Drive Gross Profit
Dollars per Order
This measure is the single biggest determinant of customer
profitability. Why is that? Each transaction type has relatively fixed activity
costs. Additional Gross Profit dollars on an order go mostly to the bottom
line. Measuring this alone doesn't change behavior, though. You need to promote
a broader mix of products and drive sales behavior to sell a broader mix to each
customer and on each order.
7. Become a Power
User of Your Business System
Business systems often lament that their user base makes use
of less than 30 percent of the available functions that can improve a
distributor's business results. Many distributors make use of basic order,
ship, bill, and accounts payable functions to the exclusion of most other
functions.
Maybe that's the problem though. The objective is not to use
your business system. The objective is to drive the business to generate more
profit by using the right techniques. If you don't know the techniques, you
won't see the value of applying a broader range of your system's capabilities. The
real problem is your people don't
Whether it is Activant, Infor, SAP or any other provider,
they have consultants that can teach your people both the theory and the
application. Your job is to measure your performance in each area and decide your
priorities. Then get started learning. You don't have to write any code. You
just need to learn to manipulate the controls on the dashboard. So get busy.
After you learn to do these things, you need to tell suppliers that don't
transact electronically you'll be selecting another supplier very soon.
8. Maintain Accurate
and Current Product and Price Data
It amazes us how conceptually simple this is and how
fundamental it is to making money. Yet, hardly anyone does this well. All you
really need to do is get the UPC number, unit of measure, description and price
correct in your database to make line items match in your computer and the
manufacturer's computer. Do this right and transactions will flow
uninterrupted, untouched by human hands for the lowest possible cost of transacting
business.
Clean product data and application of EDI or other
electronic transaction techniques can add 2-4% to your bottom line excepting
SPA claims, which can add significantly more. Using database management tools
like SQL, Oracle, Microsoft Access or the database built in to your system, all
you have to do is match your database to a correct database on the
aforementioned variables, kick out the unmatched items and fix them. Don't feed
your computer bad data.
If you haven't figured out what we're saying by now, we'll
just come right out and say it: It's all about the cash. Yours may be hiding in
the rubble after the fire.
Next Month: GrowthVision:
Expanding Your View Of Opportunity
Allen Ray has 45
years experience as a distribution business owner, information systems,
marketer of product data and consultant to wholesale distributors. Allen
advises clients on strategies to stop "Profit Leakage" and create a
scalable business that returns an increasing percentage of gross margin dollars
to net profits. Allen is collaborating with Neil to help distributors adopt the
Eight Steps to Breakthrough Growth, providing expertise in "Leadership
Productivity" and "Pricing for Maximum Gross Profit Dollars per Order".
Contact Allen at allen@allenray.com
Neil Gillespie is
a veteran distribution consultant, speaker and author. Neil worked for GE and
Eaton corporations before launching his distributor consulting practice in
1995. Gillespie helped Roden Electrical Supply of Knoxville to grow more than
500% over 11 years while more than tripling EBITDA percentage. Neil has
distilled his profitable growth methods in his Eight Steps to Breakthrough
Growth. His book Discover Your Core, Then Go For More will be
available in early 2010.
Contact Neil at neilg@shamrockgrowth.com
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