Economic outlook: Be prepared

In the face of a slowdown, distributors must anticipate customer needs and behavior more than ever

By -- Industrial Distribution, 2/1/2001

NEWTON, MASS.-As 2001 began, the economic outlook fostered feelings from mild concern to dread. Continued low-earnings warnings have a damaging impact on the industrial sector. With companies like AT & T cutting earnings for the first time ever last year, and issuing further warnings, economists say the odds of a recession are up dramatically.

According to many distributors, their businesses must review staffing, payroll and inventory plans to make sure they can weather deep slowdowns. Above all, companies must try to diversify their customer base and deepen their relationships with customers, understand problems and anticipate manufacturing closures and layoffs.

Lee Helfer, president of Specialty Hose Corp. in North Canton, Ohio, said distributors should act, and not react, in order to be prepared for customers' suddenly changing needs. While one of the evils of an economic downturn is its unpredictability, a distributor should secure financial stability wherever necessary, he said. Stocking distributors should be sure to have plenty of customers' critical inventory on hand, while reducing on-the-shelf levels of non-critical items and monitoring ordering quantities of stock items.

Luckily, Helfer said, his company feels economic cutbacks late in the process.

"We have actually seen some business get better because we sell maintenance items. As the economy gets tighter, more companies spend more on maintenance of older capital equipment. We're usually about two years behind the general slowdown when it happens," Helfer said, "so we have some time to plan. Energy costs in the last six months, however, have been putting pressure on our metal and plastics customers, and that's getting bad. We're making a better effort to keep our receivables in check, as well."

While he maintains excellent communication with all his customers, Helfer says it's naïve to expect larger companies to inform suppliers of upcoming production cutbacks or layoffs.

"We are not in that information loop at all. We do need to be ready with inventory because our customers will rely heavily on our stock. But I think in the past, especially around 1984, distributors panicked. Metals were scarce and we were paying any price. We want to be careful about not taking anything, at any price. Prepare, don't panic [in the face of recession]," Helfer said.

If a recession occurs, it would typically mean layoffs, according to the National Bureau of Economic Research, and more people looking for work. It may be possible to find a more qualified employee at that time. Therefore, distributors may want to have a plan for that salaried position worked into the budget, even if they had suspended the employee search temporarily during the boom.

Experts advise following your key customers' industries, as well, and watching your biggest clients for signs of layoffs, slowdowns or sales warnings.

"In determining whether a recession has begun, look for depth, duration and dispersion," said Robert Hall, chairman of the Business Cycle Dating Committee of the NBER, late last year. There needs to be a substantial drop in employment, a deep contraction in growth, and a broad slowdown in many industries for a recession to occur, Hall said. A genuine recession batters manufacturers of durable goods like cars and refrigerators, while softer consumer goods like soap and toothpaste are less affected, Hall said.

Dick Hall, of PRC Industrial Supply, Inc. in Portland, Me., said he sees no reason to panic. His inventory and billing procedures will remain unchanged for the most part.

"We watch receivables a little closer. If we push a little harder, customers have started telling us their ability to pay is weakening," Dick Hall said.

PRC has added services and product lines in the last two years to gain market share. Dick Hall says his plans do not include Internet B2B marketing at this time, but he has upgraded his office terminals for Internet capability. That, he says, is necessary regardless of an economic slowdown.

At RPM, Inc, Grand Rapids, Mich., they have been feeling the effects for a while, says company president Bruce Baker.

"We supply special machinery and conveyor parts. We are a small distributor, and we're seeing a slowdown with OEMs. They aren't buying new equipment. In the end-user market, it's not as bad, but they aren't repairing like they were, not ordering parts," Baker said. He, too, is keeping an eye on his inventory levels and receivables. Baker said his business is diverse, with customers in the paper, food processing and secondary auto industries. The auto industry, in particular, is slowing down and his region has already been affected, he said.

"The most important thing in a slowdown, I think, is to stay close to your customers and get a feel for their slowdowns and even plant closings," Baker said.

Another Midwest distributor, Haggard & Stocking Associates, Inc., Indianapolis, is experiencing the slowdown in the auto industry, as well.

"A significant portion of our primary market in the state is driven by the automotive and transportation industry. Currently, many of these companies have either laid off, furloughed or shut down facilities for extended periods," said William Holden, president.

One thing Holden says is a hedge against the slowdown is diversity. Haggard & Stocking has expanded its business to non-automotive markets and built up its relationship with small and medium-sized accounts.

"The theory is, 'try not to get all your eggs in one basket.'' The net result is although the economy is getting very mushy here, we have obtained several substantial new pieces of business and are increasing penetration at a number of existing accounts.

"We have [secured a better market position] over the last several years by trying to work more aggressively at the smaller and medium-size accounts. These businesses can typically be much easier to work with and present a better price point position and margin situation," Holden said.