“In what ways do established material handling businesses get complacent in times of economic growth which come back to haunt them during economic downturns? How should we best use this time of growth to set ourselves apart in the future?”
– Susan Allen, CFO, Lift Power, Inc., Jacksonville, Florida
Scott Hennie, President, Elite Supply Chain Solutions, Strongsville, OH
I believe that looking back to how we battled the “Great Recession” answers the question of how we got, and may get, complacent when times are good. In order to survive the recession, the one control we had in our business was cost. For most distributors/dealers, the biggest cost burden to the business is personnel. Cuts were made to trim personnel costs and, in many instances, those cuts were in headcount. I believe many of us learned that we were “carrying” people that we may not have needed or who were not contributing positively to the bottom line. In many cases we “trimmed the fat.” As business gets stronger and the bottom line gets healthier, I think we need to be smart about who, when and why we hire additional help. We need to make sure that the people we have on our team are contributing positively to the bottom line.
As far as setting ourselves apart in the future, that is a question to be answered internally in each of our organizations. Go back to “Good to Great” and the Hedgehog principle; what is your organization passionate about, what can your organization be the best at, and what drives your economic engine? I believe if you stay focused on these three criteria and develop a strategic plan to support your vision and mission, success will be the result of your actions.
Mark Milovich, President, Lift Atlanta Inc., Decatur, GA
I think your inquiry is a very good one. During the last downturn, we all learned a great deal about our companies- where we were strong, where we were weak, and what inefficiencies existed that we did not really know were there. I think one of the biggest areas where dealerships get complacent is in their people. During the boom days we tend to hire people that we may really not need, or hang on to people that may be only providing average results, all because of a perception that they are needed. What this last downturn has proven is more can be done with less, and people can wear a couple of different hats and get the job done quickly and profitably. As business continues to grow, and additional people do become necessary, companies will add more staff, but this time around, I think more due diligence will be done to confirm that additional staff is indeed needed rather than just perceived to be needed.
I also think dealerships get complacent with old ways of doing things and not utilizing the latest technologies to streamline their operations. During the good times we tend to think everything is getting completed quickly, efficiently and on-time. It is when business slows that we get time to review our procedures. How many of us found procedures during the last downturn and thought to ourselves, “Why on Earth are we doing this that way?” Many of us streamlined operations over the last few years and are now enjoying the benefits of these changes.
Overstaffed and inefficient operations caused many of us a lot of sleepless nights. Since this downturn was unlike any other any of us had experienced, I think we all learned something, and we will cautiously grow our businesses in the good times. I think that is the best way to set yourself apart in the future; growth for growth’s sake is not always profitable. Managed growth will reap benefits. I do not think we can go forward with a “get the order and worry about the details later” mentality. If we do not concern ourselves with the details, that is when we get complacent. I wish you much success!
Jerry Weidmann, President, Wisconsin Lift Truck Corp., Brookfield, WI
As the economy grows and companies experience increased revenue and profit growth, decisions to support and sustain the growth increasingly dominate management discussions. Growth requires capital expenditures, facilities and staffing. Profitability allows for increased wages and bonuses. Efficiency issues are camouflaged by revenue and income growth. Although a rising tide lifts all boats, it also hides the rocks and hazards that can sink your ship when the tide goes out.
1. Staffing. It is important that the ratio of staff to revenue, administrative staff to revenue producing staff be maintained at profitable levels. There is a tendency to overhire in the face of growth. Temporary help can assist in smoothing out the demand cycles, but it is important to keep staffing ratios in line.
2. Compensation. There is a tendency to give disproportionate increases in periods of rising income. It is important that wage guidelines be firmly managed to assure that wages do not increase above competitively appropriate levels. The use of bonuses and fringe benefits to recognize extraordinary efforts can accommodate top performers without disturbing wage scales.
3. Capital Expenditures. Additional and replacement service vehicles, rental trucks, shop improvements, and over-the-road hauling equipment are part of expanding your business to meet rising demands. However, all of these assets are long-lived and will be part of your cost structure for many years. Over-investing in capital assets can create excessive overhead burdens in the next, inevitable, downturn. So, managing proper rotation of assets to allow for reduced overhead in a downturn is important for long-term total return performance.
4. Efficiency. In a rising market, businesses work to keep pace with increased business volumes. There is a tendency to ignore the disciplines that are ever present in bad times. Cost containment and work flow efficiency are the blocking and tackling of profitability. Managers need to keep their focus on efficiency in good times just as much as they do in bad times.
In my view the key to being ready for a downturn is to manage your business with the same discipline, efficiency and long term view in both good and bad economic times. Every decision should be measured against the impact it will have in the long term – including the next downturn.
Chuck Frank, President, AHS, Inc., Cincinnati, OH
Great question. Several things come to mind, let me list them in random order:
• The Pennies
o A lot of companies don’t track “the pennies” as closely as they should. The key is to stay focused on the importance of cost and holding your team accountable at all the times, especially when times are good. It’s usually in the busy/good times when an error is made in calculating cost. We blame it on too many things going on, no one was available to check my work, etc. Make sure to spend the right amount of time challenging your business partners, focusing on the importance of maintaining relationships and keeping the competition out.
• Business Development
o It is critical to have a strategic plan in place and team members assigned to follow-up and follow through on landing new business. When times are good, we have a tendency to let our guard down and relax business development disciplines of dials, face-to-face calls, revenue generation, etc. With the sales cycle, from the initial call to revenue generation lengthening, it is critical to remain focused and positioned to land new business at all times.
• Ongoing Education
o When business is busy, our teams are busy, making it difficult to schedule time for ongoing educational opportunities. With companies doing more with less, it is as important as ever to empower our team members to do more. Customer expectations are at an all-time high. They expect us to provide additional services, provide it quicker, with more detail, while at the same time emphasizing the importance of keeping costs down. Adding value and strengthening our relationships are two critical keys in earning business. We have to make the time and push our team members to stay focused on keeping up with current trends and technology.
o We all understand the importance of customer retention, but sometimes forget about team member retention, especially when everyone is busy and times are good. Make sure you touch base with your team. Keep them up to speed with what is going on and let them know the importance their role is playing within the organization. Have incentive opportunities for the team, reach out to them to see how they are doing, reward them for their efforts, and stay focused on team member functions/team building opportunities. Keeping our team intact positions us to do more with less. The longer the team is together, the better they tend to play, or, in this case, take care of the customer.
Doug Carson, VP – Marketing & Sales, Fallsway Equipment Company, Akron, OH
Great question and something that we all need to focus on! From the perspective of sales and marketing, I believe companies and salespeople in general tend to zero in on the customers and products that make us money consistently – often times neglecting the difficult task of uncovering new opportunities. Prosperity has a tendency to put a warm blanket around our shortcomings. Material handling companies must invest in new and innovative ways of constantly finding new customers. From the marketing side, this means investing in website development and maintenance, social media, advertising, telemarketing, creative targeted campaigns, etc. For salespeople it means the undying discipline of new customer prospecting. This entails investing time every day in prospective customer research, telephone work, networking, and yes, even cold calls.
Another aspect of growth that takes a concerted effort to realize success is seeking out new categories of business that fit well with our core competencies as material handling distributors. Our companies’ knowledge of the material handling industry and our field service capabilities for lift truck distributors provide endless opportunities for growth in new products or lines of business. It takes time to research what is working for other companies, seek out and evaluate prospective OEM partners, and introduce new goods or service products to your portfolio. The time to accomplish these tasks is during the good times, not when you’re scrambling to react to a downturn in the economy.
Mike Vaughan, CFO Liftech Equipment Companies, Inc., East Syracuse, NY
In response to your question: businesses become less diligent on the balance sheet side of the business. There are several elements to the balance sheet that, if they require quick action, could result in lost profitability and liquidity. These elements include: aged accounts receivable, aged inventories and underutilized and underperforming rental assets. Quick actions to develop cash can result in significant losses when forced to liquidate equipment/rental assets in the auction markets. Steps to liquidate aged accounts receivable can result in increased legal/collection fees and the likelihood that discounting of amounts may be necessary to secure payments.
It is very important to maintain diligence and focus on driving Accounts Receivable DSO (days sales outstanding) down and increasing inventory turns and rental asset utilization. In addition, it can be very easy to increase stock levels of parts inventories and lose focus on the negative impact of not following a diligent return policy.
In a time of growth, it can be very easy to focus on revenue growth and lose sight of the impact on the bottom line, actually reducing ROS at higher revenue levels. Stay very focused on the “cost” of the revenue, particularly with your rental fleet. A business can be a greater risk at higher revenue levels and lower ROS because it is likely that the balance sheet has gotten larger, asset quality weakened and more highly leveraged. Growth without deterioration of ROS should be the goal of your business. Continue to look for efficiencies in the business and caution against adding employees to handle higher revenue levels, particularly where inefficient processes rule the daily activities.
Al Boston, CEO, AK Material Handling Systems, Maple Grove, MN
Great question and timely. In the last 35 years in the material handling business I have seen a repeating scenario. Times get good and companies build big company offices as a shrine to themselves and furnish them lavishly. They expand into markets or products where they have little or no experience. They hire sales staff that they wish could be sales stars. And they build inventory of items that have no track record of sales.
The problem they have is that if they have made these mistakes, they then compound the problem by holding on to the belief that everything will be fine and waste too much capital when entering a downturn. Then, disaster.
The best distributors understand that in a ten-year cycle there will be three good years, three bad years, and four average years. You should spend in all years as if it is an average year. Top distributors expand in bad times because there are great deals and they have the cash to take advantage of the great deals that apply directly to their business. Not buying into high-risk items, but investing in people, inventories, or fixed assets that they can obtain at a heavy discount. This plan takes discipline but produces high rewards.
Buddy Smith, CEO, Carolina Material Handling Services, Inc., Columbia, SC
Great question! It is amazing how that happens. We do get complacent when times are good and tend to pay for it when the economy turns around. There are a couple of things we are doing now that I hope will pay dividends when we hit another recession. The first is to build cash. This also means to understand where our available sources of cash are. The second thing we do now is have a formal process of expense management in place. This involves a task force that meets regularly to review expenses and make recommendations on where savings can be realized. The final thing that we do is what I call a “doomsday” forecast. Suppose sales drop by 25%? What would we need to do to protect margins and cash in that environment? This doomsday forecast includes a list of action steps we would need to take and could take in a fairly short period of time. We review this forecast on a regular basis.
Mike Wall, President Container Systems, Inc., Westmont, IL
Great question. Have you seen that commercial for a satellite TV provider where it starts out: “When you pay too much for cable, you get sad. When you get sad you stay in bed. When you stay in bed you lose your job….” Eventually the man is tackled by a lowland gorilla. We don’t see a lot of gorillas in Chicago, so whether or not I stay in bed, I still like my odds of avoiding that particular demise. Prolonging the agony of this analogy, staying in bed could be loosely translated as becoming complacent. So when times are good and we stay in bed, sooner or later we’re going to be looking over our shoulders for charging primates. My suggestion would be to run that commercial in a loop for all your salespeople.