Tough times: How bad are they?

By Tim Reynolds -- Industrial Distribution, 8/7/2008 8:25:00 AM

It seems clear our economy is slowing down. Although first quarter GNP grew at a slow rate, our newspapers are filled with stories about a troubled economy.

The sub-prime loan “crisis” has shaken the stock market. Oil prices have increased well beyond previous record levels. Food prices, metals prices and other commodities have also seen dramatic rises. The Fed has acted aggressively to support our financial infrastructure and interest rates are very low indeed.

All signs point to a recession. We should also be very worried about inflation at the same time—what is known as “stagflation.”

And yet:
Nearly every prospect and every customer we talk to is enjoying a very successful year, on top of great results last year. INDUSTRIAL DISTRIBUTION magazine reports that many of the Big 50 distributors report record years in the making. The United States manufacturing sector is thriving.

A big part of the answer to this paradox is those low interest rates mentioned above. Over a period of several years, they have made the U.S. dollar weaker against other currencies. As a result, our various products have become much more competitive in the international markets. Our exports are truly booming, which is great for manufacturing, and therefore, great for industrial distributors.

However:
That won’t make your job less difficult. Although interest rates are low, lenders have become very timid, given the impact of the sub prime loan problems on financial markets in general. This always impacts small businesses first, and hardest. No doubt you have experienced this if you’ve tried to increase a working capital line of credit lately, or borrowed to purchase a capital asset. Rates are low, but credit standards are very tight indeed.

In addition, given rising commodities prices and more costly imports (the other edge of a weak dollar sword), inflation is a very serious concern. This will impact your business in the form of rising purchasing prices, as manufacturers pass the costs of higher metals and other raw material prices along.

This has been going on for several years, of course. The problem comes in maintaining your margins in a competitive market place. In addition, those of you that distribute for foreign manufacturers are seeing prices there (due to the weak dollar) rising much more quickly.

A well-run distributor has the tools to deal with these issues. Utilizing an ERP solution geared toward your industry is of primary importance. Other than that, there are really only three things to do.

First, aggressively manage your purchasing. Make sure you are buying only what you need, when you need it. Understand your demands at the item level, if necessary.

Are you truly using the power of your software to support aggressive purchasing and inventory management? If you haven’t implemented any more than “min/max,” now is the time to dig in and get to a more sophisticated, aggressive and effective process. From the theory behind the process, to the practical applications of inventory management, your software should support “best practices.”

Second, just as you aggressively manage your inventory costs, you must manage your pricing. You need to work toward being able to actively manage each item’s price for each customer, what is labeled “strategic pricing.”

You may have a big customer that aggressively negotiates and shops key items he buys from you. But he buys other items out of convenience. He’s not shopping those items, just adding them to the PO. Why give him the deep discount on those convenience items? He’s willing to pay more and probably won’t even notice if you give him your standard discount.

There are several other pricing strategies like that one available, if you do the analysis and really understand what each customer is willing to pay.

Finally, all small-business owners know the importance of low overhead. Now is the time to aggressively manage your costs. If inflation takes hold, this will be critical to your ability to do business. Your software should have detailed reporting capabilities to manage your budget line by line and the tools to make your operation more efficient and streamlined.

If you’re a small business, joining a small business resource center of your local chamber of commerce will help you lower costs by providing group purchasing programs that reduce the direct cost of doing business. It also can open doors to government agencies, community organizations and economic development partners that can address your business concerns.

There is much to be optimistic about with the U.S. economy. But we all have to manage our way through the ups and downs. Taking advantage of a small business resource center and the tools offered by well-designed and industry specific software will help you lower costs and run your business more efficiently and profitably.

Tim Reynolds is the chairman of COSE, the Council of Smaller Enterprises, and the President of Tribute Inc., a firm specializing in distribution management software and support for industrial product distributors. He can be reached at treynolds@tribute.com