With most distribution channels in a storm of change right now, managers naturally brace themselves, batten down the hatches, and react defensively with cost-saving measures and day-to-day operational controls. This article is about the direction of the tide instead of the size of the waves: Executives need to manage the longer-term cycle by reacting early and offensively to gain true competitive advantage.

Distribution is normally all about managing the size of the waves. A core competence in distribution is doing staggering amounts of detail-oriented, mind- numbing transaction work exceptionally well. Distribution is relatively easy to describe, yet very hard to do well. Waves are managed hundreds of times each and every day.

Tides are very different. Everyone is familiar with the quote used by Jack Kennedy and Ronald Reagan: "A rising tide raises all ships." They were speaking about the U.S. economy. The converse is also true: "An outgoing tide lowers all ships."

Entering a harbor from sea is easy during the times of high tide or low tide. There is little current in or out at these times. Trying to enter a harbor between these two periods can be very dangerous as there are strong currents that can easily toss your ship around.

Most distribution channels are in a tumultuous period of economic change right now. It is not worth debating the semantics of how to define a recession. This article is about how to manage the longer-term cycle - whatever the pundits choose to call it.

I learned about managing cycles in the semiconductor distribution industry back in the seventies and eighties. Keith Kolaris was the senior sales executive at National Semiconductor at the time and he showed me a practical tool to work through the large business cycles that were occurring every 12 to 18 months. I am putting it back into the industry and will call it the Kolaris Cycle.

There is a large difference between sales growth and market share growth. If sales are growing at 10% each year for everyone, then share positions remain unchanged. If you are number 3 in your market you will continue to remain number 3. Share growth is when you move from number 3 to number 2. It is possible you could have a sales decline of 5% while everyone else declines at 12%.

Rule Number One: Most distributor share growth happens going into a recession (Phase 2) or coming out of the recession (Phase 4), not at the top or bottom of the cycle

Most distributors have their highest sales growth rates at the top of the cycle (Phase 1). The issue is that everyone is having their best growth at the same time so there is no share change. Lead times on products become critical and availability of product and qualified staff become the critical constraints.

At the bottom of the cycle (Phase 3) no one has any working capital or profits to invest and demand is too weak. Product is plentiful and many "below distributor cost" deals are available as manufacturers try to reduce their finished goods inventory.

Rule Number Two: Those that react to cycle changes first will gain share over those that don't.

There is an old fighter pilot maxim that says, "He who sees first, lives!" Let's examine the transition from Phase 1 to Phase 2. Remember that industry common views never predict the change. There is typically only some discussion around "pricing is softening but long- term prospects look good." What can be learned is that following the herd is not a good idea. Here are some of the early signs.

99 out of 100 businesses would look at the events above and say, "We are having some bad waves, but next month will be better." By failing to recognize the pattern, they are caught in the downward spiral of Phase 2. This results in rapidly rising inventories, increasing receivables, and declining margins. This margin decline was over two full points for some "rust belt industry" distributors during the recession in the early nineties.

The early reactor takes decisive actions long before the herd. Sales reps in one of these companies are upset because belt tightening is happening while the market is still good and sales may be lost. Here is what happens.

Rule Number Three: It is easier to fix a sales problem for a distributor when they have low inventory and great people.

By the time that the herd figures out that there is a cycle change, the early reactor has low inventory and tight receivables. Manufacturers have loaded up the channel with inventory, the herd distributors are choking, but the manufacturers still have too much inventory. Deals start to become available in the market at better purchase pricing. The early reactor has the room to take advantage of these price opportunities. When customers of the early reactor go to negotiate, the margins can stay close to the same. It is much easy to stay on the offense when the bottom line is still black. A key point in this scenario is that the early reactor distributor may find that they can pick up better suppliers.

The early reactor implements a cost reduction program that includes a reduction in staff. It is large enough to create room to do some specialized and focused recruiting. Many strong sales representatives with high customer relationship equity may finally be willing to be recruited away from their herd employer.

By the time that the cycle transitions from Phase 2 to Phase 3, the early reactor still has black ink AND available working capital. With any luck, business performance and competitive advantage are better because of an upgrade in the sales staff and the acquisition of stronger suppliers.

Sitting out the time required to move through Phase 3 is easy because the early reactor is still on the offensive in their market. Product is plentiful and deals abound as manufacturers try to get factory utilization rates back to normal (most are expensively dumping capacity). The early reactor is carefully gathering cash or debt capacity to make the "Big Bet" required for gaining share in Phase 4.

Rule Number Four: It is hard to sell from an empty wagon.

Picture the pain of both manufacturers and the distributor's customers. They have been on the defensive for months and hoping that things will get better. They are tired and frustrated. The manufacturers have dumped plant capacity but their factory loading is still low.

Imagine the manufacturer's excitement when the early reactor distributor comes to them with a huge 12 month non-cancelable order phased out in monthly releases. There may be some special terms available because they really need the business at that point in time. This is high stakes poker for the distributor but their bet is probably hedged by good margins and favorable payment terms. The next big orders from herd distributors won't get the same treatment.

Remember the old adage about draining the swamp with the alligators. What most folks never think of in Phase 3 is that most manufacturers rely on production scheduling, and FIFO backlog management. As soon as the cycle moves to Phase 4, product lead times get soft, unpredictable, and stretch out. The early reactor has locked in reliable product availability at advantageous terms. It takes 6 to 18 months in most industries to bring production capacity back on line.

When customers experience the transition from Phase 3 to Phase 4 they are excited and in a huge rush to get production up so they can meet rising demand. They don't want promises of delivery, they need product immediately. The early reactor has product and can probably get a better margin and market share along the way because they can deliver.

Then what? We slide back into Phase 1 and get comfortable again. Guess what happens next! Having reached the age of 52, I have seen the pattern repeat several times. Most of the time I was with the herd and burning energy trying to get back to even. A learning experience is what you get when you were expecting something else. This cycle issue has given me many learning experiences.

If you are already behind the curve with the herd, visit our web site at www.ircg.com for some articles on digging out of the hole.  We've got lots of experience. Perhaps this pain will create your own learning experience. Life goes on and we must still look ahead to call the next transition from Phase 3 to Phase 4. Drop us an email if you would like our opinion on the leading indicators to watch. Hmmm?