Rich Lauer, president and CEO of Spiegel’s Groveport, OH-based Distribution Fulfillment Services Inc., says that the only thing you ever know for sure about a budget is that it’s going to be wrong.
Although Richmond, VA-based F. Curtis Barry & Co. reports that catalog sellers say they were between 1% and 4% above plan all through October, rising unemployment and the possibility of more terrorist attacks make next year’s economic conditions anyone’s guess.
That potential for volatility is what makes this year so tricky, Lauer says. “I think probably anyone in this business for any length of time will have experience with growth cycles and decline cycles. When you’re going one way or the other, I think it’s pretty clear-cut about what one has to do, but when you get into a high degree of uncertainty, you have to be flexible.”
But just because making a forecast seems impossible doesn’t mean it’s avoidable. Lauer says that the key to planning in such an uncertain time is to “go through the mental exercise of ‘What would happen if?’ or ‘What what I do if?’”
Chris Merritt, a principal at Atlanta-based Kurt Salmon Associates, says that you should consider the most likely scenarios first, with volumes up or down by a small percentage, and then what would happen if volume shifted by more than 10%-15%.
One of the most important moves is to create as much labor flexibility as possible. At Monroe, WI-based The Swiss Colony, president John Baumann says that he uses temporary help for up to 75% of his labor, making it very easy for him to ramp up or scale back with relatively little notice. At Spiegel, Lauer says he uses an incentive system that encourages individuals and teams to be very efficient and look for new shortcuts wherever they can.
Merritt says that trimming labor expenses is probably the biggest source of savings, since labor can account for up to half of distribution costs. “Often when volumes are down, you’re better off not adding that second or third shift and squeezing more out of your main shift,” he advises.
Keeping supply inventory in line is another important task, particularly corrugated supplies. “You’ll tend to see that the inventory of supplies gets out of whack. You’ll tend to carry too much inventory and your volumes go down dramatically,” Merritt says.
But to keep just the right quantity of merchandise on hand, you need to understand how every element of your operation works, veterans say. Lauer says that the incentive system used at Distribution Fulfillment Services has helped his managers understand exactly how every task is accomplished and how long it should take. This kind of in-depth knowledge makes it easier to make good forecasts, he says.
Make it pay
Baumann cautions against buying new distribution and warehousing automation unless you’re sure you have the volume to make the investment worthwhile. “The technology is wonderful and it can save you on labor, but if you don’t have the volume to make it pay, that’s where you get in trouble,” he says.
Some managers believe there are opportunities in a down market. Lauer says that between the encouragement his incentive system gives good workers and the external business environment, his worker retention is higher now than it was just a few years ago.
As you might expect of a man who has spent most of his life in two gray Portlands, Portland, ME, and Portland, OR, Bill Shea seems to be an expert at finding silver linings.
Shea, vice president of operations for Portland, OR-based Norm Thompson Co., has seen bad times before, when he was at Freeport, ME-based L.L. Bean. “I’m not a has-been, I’m a has-Bean,” he jokes, in a Down East accent not sold in any store. He says that one thing he has learned in past downturns is that cutting costs doesn’t always mean cutting service.
For example, one opportunity he is taking advantage of in the current downdraft is the chance to renegotiate shipping contracts. He says he has extracted 15%-20% price cuts from his inbound shippers, which should save him $400,000 next year. He expects to clear 10% savings on his outbound costs as well, through a round of negotiations he plans to close shortly. On outbound shipping, he says, he has even been able to negotiate class upgrades for some of his contracts without a jump in price, from three-day to two-day delivery, for example.
However, Baumann warns against pushing so hard for a short-term price advantage that you hurt your supply chain in the long run. “Certainly, there’s an opportunity because a lot of these folks are seeing their value drop off as well, but by the same token, you don’t want to strangle suppliers so hard that they start to become less viable financially,” he says.
Another source of possible solace that’s often overlooked, according to Shea, is that even in a down economy, not everyone’s customers will be hurting equally. The rain may raineth every day but how severely your company will feel the recession “depends on your demographics, who you’re going after. If you’re going after blue-collar, middle America, this one probably hurts worse,” Shea says.
Live and learn
But this downturn is of course not like any other anyone has ever experienced, and it’s leading to some new frontiers in distribution contingency planning — new at least to civilian distribution experts. Merritt suggests, for example, planning for the possibility of local mail disruption in the event of an anthrax attack. “I am advising clients to take a hard look at their outbound mailing process to the customer,” he says. Merritt began advising this after a client of his in the New York/New Jersey metropolitan area found its post office closed down and discovered that finding alternate ways to get masses of material into the mail stream can be expensive and time-consuming.
Merritt suggests not only planning for the possibility of a shutdown, but also earmarking a contingency fund to cope with it. The contingency costs should include transportation, unloading, and remanifesting. While the actual number is not especially important, he says, it is worth telling the CFO that you are considering the scenario.
Fulfillment executives agree that the experience gained from surviving earlier down cycles is going to be important. “I think people learned a lot from the last recession. A lot of companies went out of business, but if they’re still around, they’re stronger and wiser,” Shea says.
One factor that has changed since the 1991 recession, Lauer notes, is the sophistication of the modeling systems he uses to make his forecasts. Although this may be an improvement, it doesn’t entirely remove the need for judgment calls, particularly at awkward stages in your contingency plan, such as a step where overtime is stretched to the limit and you need to decide whether to put on a second shift.
“That’s the trick of it,” Lauer says. “And at that point, you just have to give more thought as to whether you’re going to be conservative about that or more aggressive.” Whether the call you make is the right one is mostly a matter of the kind of instinct that you develop through experience, he adds.
But what if you’re young and don’t have that experience? Is there anything in particular you should watch out for?
“Optimism,” Lauer says.
Bennett Voyles is a New York City-based business writer who writes frequently on finance and operations issues. He can be reached at [email protected].