By Harrell Kerkhoff,
Maintenance Sales News Editor
The global pandemic has caused major shifts, disruptions, challenges and opportunities for companies and professionals involved in facility supply distribution. It’s a situation that’s likely to continue for the foreseeable future.
Throughout the turmoil, one part of business has not changed — the importance of cash flow. Michael Marks, founding partner of Indian River Consulting Group
(ircg.com), discussed the topic during his presentation, “Cash Flow Management As A Competitive Weapon.”
“The amount of money a company makes is a function of executive decision making. We are all in the middle of a major disruption (with the pandemic),” Marks said. “It’s important to think about the impact of cash, and how it should be properly monitored and used within your organization.”
His discussion focused on three main topic areas: forgotten cash flow basics, supply chain alternative approaches, and a brief bottom line.
CASH FLOW BASICS
Profit is not the same as cash. The thing that can ruin a distributor is not losing money, but running out of cash, according to Marks.
“The interesting thing is, most failures occur in the recovery phase of an economic cycle,” he said, adding many distributors were “sitting on a lot of cash” by mid-2020, especially after the federal government’s PPP (Paycheck Protection Program) became available.
“Now in the recovery phase, cash can ‘vaporize’ very quickly, and many asset-based loan covenants can be in jeopardy, triggering hard decisions. Company owners are often shocked and surprised when that occurs,” Marks said. “Trying to grow your way out of operating losses will not work. It’s also important to manage your receivables and understand that poor liquidity equals poor leadership.”
Under the current business climate involving many distributorships, Marks added that working with a funds flow statement is more important than a P&L (profit and loss) statement or balance sheet. Monitoring a two-week planner that focuses on ‘beginning cash, cash in, cash out and ending cash’ can be the best way to closely manage a company’s cash flow and availability.
“My advice for distributors (when trying to preserve cash and eliminate risk) is to conduct a stress test, involving a recovery scenario,” Marks said. “Stress testing, such as what the banking industry did after the Great Recession in 2009 and 2010, uncovers a company’s actual financial limits and doesn’t involve opinions. It’s testing, not predicting or forecasting.”
He added that stress testing is a means to measure the resilience (time before running out of cash or blowing a lender covenant) of a business, when subjected to unexpected shocks. It’s used to find:
■ Outside ranges of potential revenue increases during the next 12 months;
■ Understanding how long certain conditions will continue, including issues with supply chains; and,
■ How comprehensive a company’s contingent-designed cost reduction program is, and how effectively is it being executed.
“Stress testing helps eliminate surprises and provides added time, if corrective action is needed,” Marks said.
When implementing a basic cash flow action plan, Marks recommended the following for company leaders:
■ Start a two-week cash flow planner;
■ Focus on receivables and subscribe to a credit update service. The latter can help company officials look for financial distress among those businesses that their company does business with on a regular basis;
■ Consider innovative approaches to supply chain issues; and,
■ Get to know lenders before there is a need for their money.
Although the current pandemic has placed many obstacles in the way of conducting business, there are opportunities as well. That includes adding marketshare. Marks said marketshare gains are often connected to properly managing risks.
“It’s best to take risks that you understand, and avoid risks that you don’t understand,” he said.
He listed four factors to predicting marketshare gain. They are:
■ Leveraging a strong balance sheet;
■ Align limited resources to customers that will most likely survive;
■ Remain a optimistic leader to customers, helping them as they create the new normal in business; and,
■ Be willing to make investment bets.
On the flip side, Marks listed five factors that can predict marketshare loss. They are:
■ Serious cash flow issues;
■ Blindly taking care of a company’s largest customers, while ignoring many others;
■ Being fearful for the future and hiding under a “shell” while waiting for troubles to pass;
■ Failing to increase margins during today’s supply chain challenges; and,
■ As the market recovers, running out of working capital.
Marks presented a history lesson on the evolution of the global supply chain since World War II. He noted that the 1944 Bretton Woods Agreement, which involved countries from around the world, created a safe and predictable foundation for global commerce. It leveled the playing field related to schedule and delivery consistency, and better optimized speed, creating just-in-time delivery possibilities.
According to Marks, during the last half of the 20th century there was significant growth in global trade, helping reduce poverty. Global economic demand was increased and led to the creation of new businesses in many countries. What also followed was “good, better and best” product quality standards.
“With reliable and consistent global deliveries, and many suppliers able to compete on quality, the only factor left was price. Therefore, supply chain activity became more focused on reducing purchasing prices,” Marks explained. “In the quest for lower prices, labor arbitrage in low-wage countries made those countries major players in the global supply chain. Decades of supply chain stability narrowed the focus of most sourcing professionals as they concentrated on the next ‘upstream supplier.’ As a result, awareness of the entire value chain declined.”
He added a fundamental law of economics states that when an economy becomes more efficient, it also becomes more brittle and less resilient.
“For example, can you imagine what would happen to global economies today if suddenly there was no internet?” Marks said. “Every day is seen as ‘combat’ right now (within the global supply chain). When that happens, it all becomes about price. That is what everybody wants to talk about. The question is, how do you fix that mentality.”
There are many resiliency and whipsaw effects in play, when it comes to global supply chains.
“A ‘force majeure’ can be declared four steps back within any value chain. That can paralyze every downstream member of a supply chain long after a problem is corrected,” Marks said.
Resiliency, he added, is the ability of a process or system to take a shock, and still perform at the minimum required performance. Resiliency is increased with redundant processes or designing something to be operated at 70 percent of capacity. Both add recurring downstream costs. Marketplaces also increase resiliency, but costs are often absorbed upstream.
“Supply chains are optimized when demand and supply are balanced within the desired economic standard deviation for fluctuation,” Marks said. “Just like a pendulum has a shortening swing until it is at rest, shortages and gluts continue at lesser magnitudes in supply chains until balance is achieved.”
A simple definition of “supply chain” is the act of moving products and services through to end-users. An unprecedented period of disruption within the global supply chain, however, continues due to the pandemic.
“There will be ongoing and isolated whipsaw effects over the next several years as the weakest link in each and every value chain rebuilds. Also, the recent focus on resiliency will slow the eventual recovery, i.e., reshoring,” Marks said. “The global response thus far (to supply chain challenges) has been to do the same things as in the past, but with more urgency, more frustration and more anger.
“The question to ask, ‘Is it time to consider a range of different actions related to supply chains, involving different business models?’”
He added that customer-specific solutions to supply chain challenges generally work better than broad or rigid policies. Short-term tactical alternatives for better supply chain optimization involve three areas that Marks described as: “Flow Business,” “Project Business,” and “Both.” Benefits are:
■ Provide price discounts for deliveries scheduled beyond 90 days; and,
■ If there are large and demanding customers (perhaps involving low to zero net profit) who want to take everything (in inventory), consider allocating a limited portion of available product to each of those customers, based on interpretation of what is best.
■ Conduct training classes for customers, helping them manage their own downstream customer expectations, perhaps offering to participate in a pilot program to develop a pull replenishment system;
■ Get customers to change their bid process, and as a distributor, join that process from the beginning, which can drive availability; and,
■ Have the manufacturer, distributor and contractor post a delivery performance bond, to be provided to the end-user if late.
■ Shift selling resources to expediting, keeping customers informed of daily changes;
■ Offer cash in advance to upstream suppliers to counteract FIFO (First In, First Out) procedures, as demand stresses working capital in smaller firms;
■ Given current industry turmoil, conduct activity-based costing to measure net profit by customer, and then raise prices on those customers that are not currently profitable for your company; and,
■ Collect data on delivery date change patterns to improve predicted probability on delivery date accuracy.
Marks also recommended the book, Innovate To Dominate, by Mark Dancer, which he said focuses on ways distributors have gone beyond the status quo to improve supply chain options, gain customers and improve profits.
“There is a global conversation going on in today’s business about doing things differently for better outcomes,” Marks said. “Meanwhile, major consulting companies are addressing three critical areas: No. 1, How to get ahead of the supply chain; No. 2, How to deal with the great resignation of talent; and, No. 3, How to change the business model for the new normal.
“It’s important to be part of those conversations, and include your company’s CFO. I would also recommend looking for a current, or potential, partnering company, one that is involved in either the upstream or downstream value chain, and perhaps has a problem that it wants to address. Connect your CFO with their CFO in an effort to explore areas of potential collaboration. Also, engage with a neutral third party if a black box analysis (used to find vulnerabilities) is needed.”
A BRIEF BOTTOM LINE
Hunkering down and waiting for challenging times to pass is potentially a risky choice, according to Marks.
“Recognizing that the effects of this pandemic will be with us for a long time, and things will never truly go back to the way they were in January 2020, is important,” he said. “The real question is not when will (the pandemic) be over, rather it is how do you, as a company, continue and win? For example, the pandemic has accelerated the changing role of the field sales rep. How do you, as a distributorship, respond?
“I recommend companies conduct a stress test to remove uncertainty, and if cost reduction is needed, to do so deep and fast. Speed is a weapon. There will be opportunities to upgrade staff. Optimize your strength for the pandemic recovery point while protecting your core team.”
Marks also recommended distributorships develop strategies and scenarios to exploit ongoing market disruptions. The idea is to develop aggressive and quick reactions to new opportunities.
“During any major market disruption, the act of initiating has much more value than just reacting,” he said.