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Play #1: Focus on the Other Guys

Obviously, you're not alone. Everyone that you deal with, including your customers, employees, competitors and suppliers, is facing many of the same challenges. Most of them are probably in the "defensive" position described above. They are seeking guidance, leadership and certainty. They are probably reluctant to make long-term commitments. They are likely to have reduced expectations of acceptable performance in areas like profitability and sales growth.

By looking at the recession through their eyes, you have an opportunity to achieve a competitive advantage over those who are obsessed with their own condition.

For example, consider the following possibilities for exploiting this anxiety:

Commit to sustained and improved customer service. Distributors typically react to an economic downturn by reducing inventory and cutting staff. Both can have a major negative impact on customer service. If your competitors are taking this approach, you have a golden opportunity to gain market share and maintain sales volume.
Revisit your value added services selling proposition. In the past, you may have tried to sell your customers value added services like inventory consignment, integrated supply, vendor managed inventory (VMI) or logistics capabilities based on "net" cost reductions. If these efforts fell flat, it may have been because your customers' buyers were incentivized on purchase cost reductions alone and therefore had no interest in complicating their jobs with sophisticated supply chain programs. In the current economic climate, however, companies are being much more honest in their search for true cost reductions. You may now find a more receptive audience for this kind of cost containment. Who knows, you could make the buyer a hero and even save his job.
Add some new product lines. This may be an ideal time to approach vendors that rejected you in the past because demand outstripped their capacity. In addition, manufacturers who set up direct sales channels during the 1990s are finding that they involve high fixed costs and may not be self- supporting with reduced volume. Along with generally lower demand, these factors are making suppliers more anxious to expand their channels and find new partners.

These examples are intended as food for thought; they may or may not be appropriate for your company. We suggest a brainstorming session to discover appropriate actions based on your own specific situation. List the recessionary effects that you think your partners are experiencing and then try to identify actions that you can take to exploit each one.

[For more "big picture" ideas on managing through a downturn, see J. Michael Marks' "Managing Across the Economic Cycle" at www.ircg.com.]

Play #2: Don't Downsize, Upgrade

Personnel costs, especially for the sales force, offer a tempting target for cost reduction. Many companies, however, make the mistake of approaching a reduction in force solely from a budgetary standpoint instead of considering the value of their most important asset. For example, they may compare the compensation for each sales rep against the total gross margin of his accounts and shoot the guys with the worst ratios. Unfortunately, this approach won't account for growth, differences in territory potential, strategic sales objectives or other factors that are vital for your company's success. A better approach is to let the poorest performers go and then rework the account assignments as necessary.

Most companies also make the mistake of failing to exploit labor market opportunities during an economic downturn. They focus on reducing headcount instead of upgrading the quality of their staff. Remember when it was impossible to find good salesmen or managers even at ridiculous salaries? Well, this is your chance to grab that top talent that wasn't available to you last year (and may not be available next year). Also, don't limit yourself to the unemployed. In their "defensive" zeal to cut costs, many companies have reduced compensation plans or increased the workloads for top performers, creating a pool of disgruntled candidates.

Once you've determined that a force reduction is needed, think strategically to get the maximum benefit from a painful exercise. Keep in mind that approximately the same number of people will be terminated in any scenario - your options are limited to determining who will be sacked rather than how many.

Don't rely solely on department managers to select the staff cuts. The managers will invariably select the people who will be "easiest" to let go rather than the poorest performers. You will tend to lose more of the lower level employees (because their jobs are easier to re-assign), thus mitigating the cost savings. You will have lost the opportunity to weed out poor performers simply because their removal would inconvenience their managers. A better approach is to use recent performance appraisals and solicit input from additional sources like customer surveys and other managers.
Don't depend on voluntary early retirement. Although it may seem a fair and simple approach, you will tend to lose the best performers who are most marketable elsewhere. Also, this option usually entails substantial payouts to be effective.
Don't cut "rank and file" pay. Another reasonable sounding alternative that almost always turns out bad. Unlike layoffs, pay cuts leave the affected people in place to spread bitterness and resentment. You will hurt morale and also lose the opportunity to unload your poor performers. Across-the-board reductions in upper management pay, in contrast, are a viable tactic. Your top management team should be more receptive because they have a bigger stake in your company's future and better visibility of its financial condition. In addition, such cuts will probably save more money and send a strong message of commitment to the rest of your staff.

[For an excellent summary of sales compensation considerations during a down market, see Mike Emerson's "Don't Give In to Temptation" at www.ircg.com.]

Play #3: Use a Process Approach to Cut Costs

During a downturn, cost cutting becomes more urgent than ever. Most managers start the process by looking at the income statement for the last quarter and identifying operating expenses to cut. This is certainly an appropriate response, and if you've not already done this, by all means, do so immediately. Many companies, however, have already tried this traditional approach and are looking for new ways to reduce expenditures.

At Indian River, we have had great success in finding excess operating costs for our clients by using a process approach. Instead of looking at costs from a financial accounting standpoint ("we're spending too much on office supplies"), the process approach looks at activities and examines their value ("do we really need to make photo copies of each packing slip?").

An easy way to do this is to "staple yourself to an order." Follow a couple of customer orders all the way from order entry to shipment. This technique will help you really understand all the steps required, the number of different people involved and the opportunities for error. It's imperative that you physically follow both the order paperwork and the actual inventory being shipped. Don't rely on someone's description of an operation - see it for yourself. As you walk the orders through, look for activities that don't really add value or could be streamlined. Perhaps more importantly, look for all the other activities in your operation that never touched your orders and ask why you're doing them.

This approach is a simplified form of the analysis used for activity based costing (ABC) and business process re-engineering. Of course, whole books have been written on this subject. There are, however, a few basic principles that almost anyone can use to find the "low hanging fruit:"

Document the way the process really happens, not the way it should happen. You will often find that, by simply describing a process clearly, you will immediately see ways to do it better.
Evaluate every step in a process to see if it is really necessary.
Attempt to do steps in parallel (at the same time) rather than sequentially.
Avoid unnecessary hand-offs between people. This is typically a large source of error.
When in doubt, choose error reduction over speed. It is estimated that over 25% of the labor cost in the distribution industry is involved in correcting errors.
Consider using a "fresh set of eyes" to examine your basic processes. An outsider can avoid a lot of the company culture and politics that often cause a faulty internal diagnosis. An experienced consultant can also recommend best practices from other companies and industries.

The result of these efforts may lead you to initiate formal improvement projects. However, you shouldn't make the mistake of confusing "project" with "long payback period." Well-selected and executed initiatives can generate positive cash flow in weeks. The key is to identify opportunities that offer incremental payback - that is, they start saving you money (or improving sales) as they are implemented. This is in contrast to most projects, especially those involving technology, which consume your investment months or years before yielding any financial gain. In our experience, marketing data mining, inventory management improvement and facility consolidation are areas that can offer significant financial rewards in a relatively short period.

Still feeling stressed out? Listen to our former Surgeon General, C. Everett Koop, who writes: "Stress is typically caused by external events and situations that are painful or overwhelming, and that leave you feeling out of control." Take the offensive to regain control; it will make you and your business feel better.

Steve Deist ( This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ), Operations Practice Manager at Indian River Consulting Group, is available to speak on this and other distribution topics. IRCG is an experienced based firm specializing in Distribution. Started in 1987 by J. Michael Marks, IRCG's specialists consult with distributors and suppliers to make the changes necessary to maintain competitive advantage. You can contact them by calling 321-956-8617, or visit www.ircg.com for more information.

Please contact Sandie Stewart at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it for republishing permission.

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