Celebrating Freedom ... And Staying Free from Unions

As we celebrate our 233rd birthday this weekend we wanted to wish you a wonderful weekend with family and loved ones.

The Declaration of Independence was conceived based upon the concept that people had the "right" to pursue "life, liberty and the pursuit of happiness." This freedom is what makes our country unique, and great. The ability to express oneself is an inalienable right, protected by the First Amendment of the Bill of Rights.

And it's interesting, when elements of Congress don't get what they want initially, how they can try again, especially if their "benefactors" want them to!!

By this we mean "Card Check" legislation. It's baaaaaaaaack according to an email from NEMA. The email states:

We have learned that some form of the misnamed "Employee Free Choice Act" may come up for a vote in Congress this July. The legislation would replace the well-established secret ballot electrion process for deciding union memberships with a "card check", and woudl subject employees and employers to mandatory binding arbitration if they ail to agree on contract terms within a specified period of time.

Senator Tom Harkin (D-IA), who is managing EFCA in the Senate, has pledged
action on some form of EFCA before the August recess. If the Senate us
unable to pass an alternative "compromise" version of the bill, the current form of EFCA could be brought before the Senate for a vote. Vice President Joe Biden and Secretary of Labor Hilda Solis have reiterated the administration's support for this legislation.

Now is the perfect time to contact your legislators - especially Senators -
and urge them to oppose EFCA in ANY form. While it is important that every
Member of Congress hear from manufacturers (and distributors) on this important issue, it is critical to contact the following Senators during the July 4th recess period to urge them to oppose all votes (including cloture) on EFCA in any form:

Senator Evan Bayh (D-IN), phone 202-224-5623, fax 202-228-1377
Senator Michael Bennet (D-CO) phone 202-224-5852, fax 202-228-5036
Senator Kay Hagan (D-NC) phone 202-224-6342, fax 202-228-2563
Senator Mary Landrieu(D-LA) phone 202-224-5824, fax 202-224-9735
Senator Blanche Lincoln (D-AR) phone 202-224-4843, fax 202-228-1371
Senator Ben Nelson (D-NE) phone 202-224-6551, fax 202-228-0012
Senator Mark Pryor (D-AR) phone 202-224-2353, fax 202-228-0908
Senator Arlen Specter (D-PA) phone 202-224-4254, fax 202-228-1229
Senator Mark Warner (D-VA) phone 202-224-2023, fax 202-224-6295
Senator Jim Webb (D-VA) phone 202-224-4024, fax 202-228-6363

Several of these senators have asked for details of how the EFCA would
impact specific employers. NEMA members (and all companies) are encouraged to explain how this legislation could impact their operations or cost jobs.

We encourage you to call your Senator and one of the above (or flood their faxes). You can also email them at NEMA's "Take Action" website.

On this weekend when our forefathers declared our freedom, let's make sure that we retain the right to secret ballots and choice. Why save unions (who are losing members) and why ask for increased goverment involvement?

Enjoy your 4th!

Are You Adapting to Tomorrow's Manufacturing Environment?

Last month's issue of Forbes magazine had a snippet on manufacturing in America. While the industrial marketplace in the U.S. has contracted over the years and 7.5 million manufacturing jobs have been lost in the past 30 years, it is a fact that 20% of the world's manufacturing still occurs in the U.S.! Surprisingly, the U.S. is still the world's largest manufacturer with $1.6 trillion in manufacturing output.

The article emphasizes that manufacturing will always be in crises due to improved productivity and that the U.S.'s value is "The growth will be in the ideas that come with the hands: innovation, automation and customization."

This link will lead you to a number of insightful articles regarding the future of manufacturing.

This then begs the question, "If this is the future of manufacturing, how do distributors and other OEM / MRO service providers adapt?" What new services and skill sets are needed? How does your strategy need to change? Will the customers you currently serve be the customers, and industries, that will need to be served? Are you calling on all of the potential levels within a customer? Are you involved in your areas planning so you can gain marketplace intelligence?

Lots of opportunities, albeit the answers may not be readily apparent. The key ... what do you want your future to be?

Gaining Market Intelligence - Manufacturer Style

or this could be called "protecting your back-side"!

The economic challenges faced by many distributors creates concern amongst manufacturer credit personnel about a distributor's ability to satisfy their obligations (pay their bills). This can particularly be an issue for smaller distributors who are being significantly impacted by the downturn in the residential and light commercial markets. Additionally, companies that are highly leveraged represent another area of concern.

While this is an area that many manufacturer salespeople / reps are not overly familiar with, doing the work to write an order and then realizing that there is no commission as no payment is received is very demotivating, especially since in many cases the order could be placed elsewhere.

Manufacturer credit personnel have access to a number of financial information tools - Dunn & Bradstreet, NACM resources and meetings and the EMCB.

EMCB, Electrical Manufacturer Credit Bureau is the only one of these resources devoted to the electrical industry. Aside from tracking payment information and having a distributor company overview, an interesting feature is a manufacturer's opportunity to post questions about a distributor to solicit input from others as well as post their experience with particular distributors. The benefit is that credit information is shared and losses can be minimized. The system also includes a database of distributors.

Many distributors are not aware that this manufacturer service is available, but just like distributors "talk" and participate in local NACM meetings, manufacturers talk also. If you are a rep calling on smaller distributors, or someone you think may have issues, touching base with credit to see what they are hearing may be prudent. Distributor management frequently does this on their larger customers.

Managing vendor credit can be critical to a distributor's success as it impacts the ability to get product. What's your "credit rating"?

SPAs To Grow in Importance ... Drive Profitability

Recently we conducted research on the state of SPAs in the electrical market for a client, from which we then wrote a white paper. The client, Datalliance, is offering the white paper on their website. They didn't have any input into our methodology, the questions, who responded or the final results.

Some may recognize Datalliance as a VMI provider. They've been mentioned recently in relationship to VMI with Graybar, Siemon, Kirby Risk, Leviton, IDEAL Industries, and more (to see a partial client list, click here). Other clients of note include Rockwell, Philips, Schneider Electric, Eaton, Hubbell, and Allied Tube & Conduit

The findings were very revealing and validated two industry perceptions:

• SPAs are integral to the profitability of a distributor
• The cost of administering SPAs, including not claiming, is a significant impediment to distributor profitability (as well as distributor / manufacturer relationships), let alone lost productivity.

Other findings included:

• SPA's are prevalent (with a number of distributors reporting more than 250 SPA agreements) and are expected to grow.
• Distributors and manufacturers see SPA's as a competitive advantage and important to profitability.
• Most of the industry's leading manufacturers and distributors utilize SPA's
• The majority of distributors said 10-50% of their sales were driven by SPA's and rate SPA's as a very important issue for their future.

Distributors have a number of frustrations with the current SPA environment:

• Every manfuacturer has a unique process for handling SPAs, making it challenging and time-consuming to submit and track claims. A strong IT department, and processes, are necessary.
• Very few distributors have business systems that completely automate the SPA process - requiring an inordinate amount of paperwork and manual effort.
• Distributors feel that their profitability is negatively impacted (missing SPA claims) due to the complexity of agreements, internal data management processes, and varying manufacturer claim processes.
• Distributors feel the claim process is very slow and negatively impacts their cash flow.

While others have tried to establish industry guidelines, the bottom line is that SPA administration is between a manufacturer and a distributor. The tighter the relationship, the more profitable the relationship will be for both parties - in taking market share as well as ensuring mutual profitability (and reduced friction due to problem claims). Automation is the key. With the name of the game being market share and profitable cash flow, how you manage your SPA's is important.

To download the white paper, click here.

What are your SPA frustrations (and if you dare, best practices)?

The Auto Impact

The past couple of weeks have brought us a new automotive industry.

Consider

• GM & Chrysler are / have been in bankruptcy
• Chrylser now reports to Italy (Fiat)
• Saturn is now a distribution company for auto manufacturers, having been purchased by Penske, who will contract manufacturing to GM and other manufacturers
• Dealer networks have been slashed
• Many Tier 2 and Tier 3 auto parts suppliers are seeking the protection of bankruptcy and hoping that they will be paid by the "new" GM and the "new" Chrysler
• GM is now part of the private equity plan to help Delphi out of bankruptcy

and much more.

What does this have to do with the electrical industry? Think of the many electrical products that are used in automotive plants and in the vehicles. The auto industry structural changes, plus the decline in auto production, will impact many manufacturers (don't need LEDs for headlights in cars, less electrical tape in cars, less wire, etc...). Distributors will be impacted with fewer MRO needs for less plants (let alone more pressure to reduce their margins).

Further, given the wide spread geographic impact of an auto factory, many of these areas may experience even further commercial and residential market erosion.

The upside ... some plants will find other usages, hence renovation work. Existing plants will need maintenance and startup work. Ideally, the auto industry will be stronger in the long run and create new opportunities (plant changeovers for smaller cars, electric / hybrids, battery factories, etc...)

Unfortuantely electrical distributors in the Detroit area have suffered significantly over the past couple of years with many directly dependent upon the auto manufacturers. Others have been indirectly affected as the commercial markets have plummeted. The questions then become,

• What is the impact for distributors in other parts of the country who serve auto plants and auto suppliers?
• What is the impact for the OEM market for electrical manufacturers?
• And what actions can be taken to survive the summer shut downs of Chrysler and GM (and the plants / suppliers they affect)?

Are You Receiving Your Utility Benefits?

•Energy efficiency remains a market that represents opportunity for electrical distributors. The key is understanding how to pursue it and targeting efforts.

•Over the past couple of months a number of new energy efficiency incentive programs have been developed by local utilities. You can find recent ones here.

•While the federal stimulus program offers opportunities for local projects and federal agencies, the “shovel ready” projects don’t represent many short-term electrical material opportunities (unless you do highway lighting). Helping your customers become more energy efficient, save on their energy costs and save on their materials (through energy rebates) can provide you with a stimulant.

•Most distributors are still on the sidelines when it comes to energy efficiency, reluctant to develop a strategy or invest in resources to generate demand. Many prefer to either bid projects or address opportunities in a “one-off” mentality and rely upon their reps. To each their own, but to those who focus may go the riches. In fact, in speaking with an industrially-oriented distributor last week, their industrial business is down more than 25% however their energy business is up significantly due to utility rebate programs and educational opportunities (and they are actually hiring on that side of their business!)

•There are segments of the market that are growing. A little research, some planning and quick action can help you take share. What are you doing to go after this market?

Are You Sledding?

A comedic thought for today.

Recently we wrote an article for Electrical Wholesaling categorizing distributors as smart growth companies, cash flow companies or reactor companies (and yes, some may be toxic!). The article will appear in the June issue. (if you would like a writer's draft, email us - David, Allen)

A differentiator amongst the type of company is their approach to the market and their appetite for taking risks (and developing strategies). The approach can be epitomized in this Calvin and Hobbes comic:

Taking risk is critical to taking share.

Today's WSJ highlights companies that are taking advantage of the recession to "bargain hunt", using the recession as leverage to expand or gain better pricing. The article references United Airlines considering a $10 billion aircraft order with the suppliers financing it, Exxon increasing its investment in exploration and industrial equipment distributors seeking pricing concessions from their suppliers.

So how could you use others' problems to create opportunities for yourself, presuming you have access to cash /credit (either your own or someone else's)? Could you increase / improve your sales organization with new hires? Expand your reach through an acquisition? Diversify into a complementary market through acquisition (i.e. energy)? Perhaps get a better price on the ERP system you'll need in a year or two? Consider an incentive program and use the travel slowdown to negotiate a good rate? Improve your facility (either a move, or an expansion - real estate is less expensive in many areas) or re-negotiate your lease.

Opportunities abound if you are willing to take risks.

And if you like stupefying security and prefer to be a cash flow company, make sure your inventory is sound, your pricing is competitive, costs are in line and processes are refined.

Chrysler, GM and the Electrical Industry?

No, we're not talking bankruptcy (although GM did file today), but dealer management.

Over the past month, Chrysler and GM have essentially reduced their dealer networks by about 1900 dealerships, (about 800 out of 3200 for Chrysler and 1100 out of about 6000 for GM). Essentially, 18-25% of their network. There have been reports that almost 40% of the Chrysler dealers who were cut had ANNUAL sales of less than 35 cars. The GM dealers that were cut represented only about 7% of sales.

Why is this of interest to the electrical industry other than lost sales opportunities?

Chrysler and GM streamlined their dealer networks, thereby reducing their cost of doing business as well as possibly improving pricing power for remaining dealers, making both parties more profitable. While they may now not be "everywhere", they are where sales are.

Many electrical manufacturers appear to have a saturation, or intensive, distribution policy. Some appear to sell to "everyone", thereby pleasing few, and creating competition for everyone. National chains further compound the challenge with the need to sell to all / many of the branches of a national chain.

The question becomes, could electrical manufacturers, and distributors, be more profitable if manufacturers were more discriminating in whom they authorize, or sell, their products through? Could fewer, more supportive, distributors be more beneficial (profitable) for manufacturers? Would distributors be more profitable if there was less competition for some brands (and more manufacturer sales and financial support)? Is it necessary to cover every geographic market?

Or, another way of asking the question could be, do manufacturers understand their cost of doing business with each of their distributors?

While manufacturing is a volume and plant utilization game, could the same, if not more, volume / utilization be generated by 10-20% less distributors doing business with them?

As companies pull back (distributor branch closing and consolidation, inventory reduction, distributor line consolidation), will stronger "partnering" become more important and small purchasers (smaller distributors, those who don't purchase much from a manufacturer, etc) be reconsidered by manufacturers?

And will the electrical industry, or at least some manufacturers, become like Chrysler and GM, streamlining their channel and emerging more profitable?

If you were / are a manufacturer, what would / should your strategy be?

Promoting Low Price to Contractors

The Internet provides the ability for business interactions to become more transparent. Many distributors have used systems that integrate them with GCs and contractors to ensure projects are kept on schedule; distributors and manufacturers have been streamlining their processes through EDI, VMI, POS and SPA systems; and training is frequently done over the web.

With increasing transparency, however, comes the opportunity to promote pricing to a wide audience. Many companies use a "list", "MSRP", or promotional price to drive demand (or like Amazon, an everyday price.)

Recently we ran across a company that is promoting electrical material pricing, and comparisons, to electrical contractors. The site is called RealPricer. It features a catalog number, product description, trade price, and then three other prices (median price, highest price and lowest price). And as you would expect, the lowest price is significantly significantly lower than the trade price in most instances.

Essentially, the system appears to be telling contractors what other contractors are paying across the country. Or in other words, how to accelerate margin suppression, and possibly deterioration, for distributors (and eventually manufacturers).

While everyone has the right to charge as they see fit, we found it interesting that RealPricer is operated by Vision Infosoft, which has a relationship with Material Express, which provides product and pricing data to distributors, and Invoice Connection, which provides e-invoicing and other outsourced billing services for distributors to their customers. Or think of it this way, they have access to manufacturer content (to push to distributors) and distributor pricing (through management of the billing system).

Consider:

• Could the pricing be harvested from actual distributor / contractor invoices? Remember, the three companies have common management teams.
• Could you be contributing to pricing transparency throughout the industry?

For an industry that is challenged with increasing margins, RealPricer can make it even more difficult to improve your profitability.

We advocate e-invoicing as a strategy to reduce operating costs, improve customer satisfaction and improve cash flow. Many distributor ERP systems have the capability to enable a distributor to implement e-invoicing on their own. While outsourcing can be cost effective, it could also be a contributor to enhanced pricing transparency. Buyer beware.

With others trying to make price more transparent in the industry, it begs the following strategies to consider:

• Have you recently conducted a price competitiveness survey to better understand your rmarket? Are you known by your pricing strategy?
• When was the last time you reviewed your price matrices?
• Should you consider a pricing audit to better identify your pricing challenges, and then fix the problems?
• If the market focus becomes price, do you need to reconsider your unique selling proposition and enhance sales and marketing to better, more clearly, differentiate yourself to each applicable audience?

Your thoughts about price transparency and competing against / with price.

NAED Electrical Leadership Summit (Annual) Observations

The recent NAED Electrical Leadership Summit (aka NAED Annual or National) was one of the quietest conferences we’ve been to in a while. While attendance was 50-60% below recent annual meetings, and was more like a regional meeting (the number of registered distributors approximated the NAED Eastern), and the venue was vast (hotel plus a convention center), it seemed like few people were around. We presume many were sequestered into supplier meeting rooms or suites. In fact, many of the CEO level personnel for a number of manufacturers were not seen at all (and some large distributors left Sunday and Monday morning.)

A question that was raised was “will the NAED ELS (Annual) become a meeting place for solely larger distributors?

Although it was quiet, a meeting can be as productive as you want to make it. Many distributors reported that they were able to accomplish their goals.

Some highlights:

• Pretty much all distributors were down, from 10-40%, with 30% seeming to be an average. Some observed that it appeared that many distributors were “accepting” / “capitulating” to the economy and accepting that this is the way the business is, and will be. Progressive distributors are looking at solidifying their base, better understanding their marketplace, and pursuing niches (application and market segment.)
• From an economic outlook, three speakers felt the economy would have some slow growth late this year, slow growth in 2010 and slightly accelerated growth in 2011, with 6-8% inflation in 2010. Those with economic experience in the electrical industry cautioned that the electrical industry recovery, in all probability, won’t mimic the national economic recovery. Electrical lags the industry.
• The general session speakers were good. Topical sessions, according to attendees, were mixed.
• Some key points from Stu Varney’s presentation included 5 things that are / will transform our economy. They include a technology crunch (self-service, smaller); credit deleveraging; decreased role of Wall Street; increasing pace of change; and a tax and regulatory policy that is more akin to Europe.
• Interesting that Eaton was the top sponsor but there were two Philips signs in the middle of the dais, although Philips was not listed as a sponsor. They must have paid for something, but it detracted from Eaton and was distracting, especially since they had spotlights on them.
• It seems like Graybar must be the only distributor in St. Louis. Apologies to French Gerleman, Frost, Western Extralite, Rexel, St Louis Metro and others. It appeared that Graybar was featured in every NAED video that was shown, designed to spotlight various NAED initiatives.
• Thought ... since NAED is an association for all (those who attend and don't attend) and since the organization is funded by all its members, perhaps they should make the general session videos and workshop session presentation handout materials available online to all members (manufacturer and distributor). This would add value to membership, perhaps encourage people to attend based upon the quality of the information and help those who couldn't attend improve their business. Just a thought.
• There were a number of solar and wind companies in attendance. Much was learned by all. The solar/wind companies were evaluating the channel to see if it makes sense for them; electrical distributors learned there is more to this market than shipping panels and writing orders for wind turbines.
• Rexel introduced its new structure to manufacturers, A-D had a meeting to introduce a new marketing initiative with its manufacturers, Rockwell expressed flexibility on some training attendance (the key surprise is the word “flexibility”), the Manufacturer Advisory Council made a pitch for NAED’s tools. Surprisingly, only about 45 distributors have purchased NAED’s Green Electrical Guides (which, worst case, manufacturers and distributors should request the .pdf to learn more),
• According to some potential acquirers, the reason for minimal acquisition activity is that most distributors who are up for sale should be sold for a discount to asset value. These are $30-50M companies that were considered “good” companies in 2006 and 2007.
• Manufacturers have made many cuts, and continue to make more (and to travel budgets – reps will be on their own and on the phone more/doing more paper work), and are looking for new ways of doing business. Interestingly, a number are interested in alternative pricing strategies (as well as ways to reduce the inventory that was returned to them). Some reported increased OEM sales in April, a potentially positive sign.
• The booth sessions, with manufacturers in the booth, were very quiet, especially with more than 1 manufacturer / distributor (and some manufacturers didn’t take booths at $1600/booth – although wind/solar didn’t pay). Makes one wonder about the ROI of taking a booth (and everyone doubts distributors pay the same when they are in the booths.

Overall conclusion … a meeting is what you make of it. It would be nice if there were more distributors. Many manufacturers commented that the Annual meeting should be history and recognize that NAED has a revenue challenge – losing money on meetings but needing to retain revenue to maintain staff and programs. Some commented that NAED should start reducing the number of rooms for the regionals given the economy and recent turnouts. If an association that has about 450 distributor members can only get about 15% of its members to attend an annual, perhaps it is not just the economy but the value of the meeting elements. Rumor is that there is discussion amongst NAED BOD to encourage changes (but hotel contracts reportedly inhibit change).

The questions then become …

• If you attended, what were your thoughts on the meeting?
• If you didn’t attend, why not?
• Any thoughts on what NAED’s meeting schedule and format should be?