Examining all 19 wholesale distribution sectors, recent research from MDM paints a picture of a selling environment where consumer and government spending are keeping the economy healthy, but where manufacturing continues to soften. Annual revenue changes for the industry overall represented 1% growth in 2019 versus 2018. “We’re expecting a rebound in activity in 2020,” Indian River Consulting Group’s J. Michael Marks said in a recent MDM webcast.
Despite his bullish outlook, Marks cautions distributors to look more closely at industry disruption versus economic conditions, and to factor the former into any good cash flow management approach. These steps go beyond shoring up balance sheets, taking out lines of credit, and doing a better job of A/R collections. They range from getting sales involved in the process to collaborating with key suppliers to developing “moats” that help your distributorship stand out from the pack.
Defined as “hard-to-digitize services,” these moats have helped companies like Anixter maintain competitive advantage in both good and challenging selling environments. “Anixter created a moat and was very public about it; they’ve been doing it for years,” says Marks. “Ultimately, it’s about being able to separate out a percentage of revenue every month that doesn’t sell well using a part number on a website.”
On the supplier collaboration front, Marks encourages distributors and manufacturers to have frank discussions with one another versus just sending invoices and payments back and forth. “Look at who’s doing what in the channel, and figure out ways to reduce redundancies,” he advises. “That advice stands in any economic conditions.”
Marks tells any distributor that wants to preserve through a recessionary period and/or an industry disruption to focus on building a great customer experience. “Most managers and owners don’t know their customers; they just get information from their salespeople,” he says. “Gather the data and insights that lead to a better understanding of your customers, and then allocate resources appropriately.”
Finally, Marks points out that companies only gain market share on the shoulders of an economic cycle, and not when everyone else is going strong and growing quickly. “No one had cash to grow at the bottom,” he notes. To best position themselves for success during and after a possible downturn, Marks says not waiting until it’s too late to get aggressive with receivables collections and inventory reductions will go a long way in helping to preserve valuable cash.
“Pay attention to your cash-to-cash cycles, knowing that most distributors tend to get complacent with 10 days of cash to withdraw,” says Marks, “and don’t be afraid to dramatically reduce inventory, knowing that manufacturers will sell at lower prices when they’re stuck holding finished goods inventory and everyone’s cancelling orders.”
In a new white paper launched by Modern Distribution Management (MDM), we explore the current business environment, show how it could evolve over the next year or two and provide actionable advice that all companies can use to preserve cash flow in any economic condition.
Click here to download “How You Can Preserve Cash Flow to Strengthen Business in a Slowing Economy” white paper.
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