CONSULTANTS TO THE AFTERMARKET

Bill Wade

 

Setting Priorities to Embrace Heavy Duty’s "New Normal"

Suppliers and Distributors Face Similar Issues, but Not All Are Obvious

By Bill Wade

Recent turmoil in both the general economy and the heavy duty business should have put everyone in our business on the highest levels of alert for something we all know is coming - The Recovery.

We will survive whatever the EPA or new credit rules throw our way. Freight downturns aren’t forever, nor is a deficit driven kink in municipal fleet spending. But survival is not a strategy, nor does it substitute for thoughtful tactics.

Even for those who avoided the most severe effects of this crisis, uncertainty about the future is abundant, and credit is still tight. Both capital and management time are available for only a few relatively big moves, and a new respect for risk must be recognized.

While it is critical to push your entire team to prioritize opportunities, all must learn anew to cast a dispassionate eye on costs, benefits and risks of pursuing them.

Here are some key questions every manager should be considering as the recovery approaches. Priorities should be determined before we are actually out of the woods. Our business has had a terrible record of missed opportunities coming out of past slumps.

Have you changed enough? A weak economy strangely makes it easier to implement unpopular operational changes; management and end users have more leverage over suppliers, while employees understand the need for change.

When the economy strengthens, these options will quickly vanish. Now is the time to examine how much more restructuring might be undertaken to secure your improved cost position for the medium term. The long term has been rendered irrelevant for planning.

Also, have you taken advantage of the buyers’ market for talent and other resources? Most companies have focused on cutting costs - head counts, discretionary marketing expenditures, R&D, product development and capital spending. Research on previous downturns shows that the future winners made disproportionate investments in talent, marketing, R&D and capital spending at exactly this point.

What shape will a recovery take? Much uncertainty remains about the recovery’s nature and pace, or cause and remedy for that matter! A steady recovery over 12 months would pose very different challenges from those of a timid one of three years (or even a slip back into recession), not to mention a demand rocketship. Will the curve be V shaped, W shaped, U shaped, L shaped, J or N ?

How would you deal with the possibility of rapid cost inflation with continued user price pressure, higher technician unemployment, increases in demand for value line and private label or dramatic swings in fleet purchasing patterns?

In 2008, the key question was what would happen if the downturn was worse than expected. Today, I feel it’s worth considering what happens if the surprise comes on the upside. An intense focus on reducing costs and working capital (not to mention the automotive OE effect) will leave many suppliers incapable of responding to a rapid pick-up in demand. Can yours respond without either bringing back high costs or cutting the quality of their products?

Since excess leverage inflated demand and profitability before this turmoil, managers must understand what they should expect as the ‘new normal’ after the crisis has fully passed and set appropriately revised performance and growth targets. We are definitely not in Kansas anymore, Toto! (and we’re not likely to return anytime soon).

Can your finances support an upturn? Growth requires capital. Companies may require more working capital or have to finance the development of additional products, geographic coverage and marketing programs or the acquisition of new business or failed competitors.

Credit and equity have become scarce resources and new financing may not be timely enough to support a full recovery. To finance growth, prepare a battle plan. Include ways to line up new equity, as well as new debt that can be activated if necessary.

Should you call old girlfriends (potential alliance partners)? Do you have a short list of acquisition targets ready? So far, equity market valuations are recovering a lot faster than economic fundamentals. Companies that wait for clear evidence of recovery before moving on attractive deals may well find themselves preempted by better-prepared competitors and miss the opportunity entirely as valuations bounce back.

Last year, many companies put discussions about strategic alliances and joint ventures on hold. Businesses that emerge from the recession at a competitive disadvantage could find a quick and effective solution in joint ventures with companies in a similar predicament.

Are you ready to divest recently disappointing suppliers or distributors? There’s no room for sentimentality in product portfolio or market coverage planning. The downturn changed many end user vocations fundamentally, and once-strong product lines may emerge in a weaker competitive position.

Dumping them now may be better than spending the next economic cycle trying to fix them. New buyers will emerge as the market recovers. Companies can then free up cash for better service, and nothing pays off better than servicing the core to death.

Can you sell your recovery plan to the bank? Too many companies were unprepared for the downturn, lacking clear plans to communicate with investors or good answers to difficult questions from banks. Don’t be caught without a response when someone asks you what you’re doing to capitalize on the upturn.

The market collapse of 2000-02 took the NASDAQ down nearly 80%... while big idea new distributors like Amazon zoomed up more than 400% (October 2002 and October 2007) ... eBay more than 150% over the same period. Apple went from $4/share to $167!

A few big ideas that become realities will be worth much more than a dozen that don’t quite get launched. Ask yourself which handful of bets could have the biggest payoffs and then mobilize the bulk of your time, capital and resources making those bets succeed.

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