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Necessity Is The Mother Of Innovation

By Amy Radishofski, Features Editor, Manufacturing.netIn times of economic uncertainty, many companies find themselves re-evaluating their strategies and evolving their operations.

The world is constantly changing. As it always has been, adaptation is the key to survival. If you can’t follow evolutionary trends and adapt your business accordingly, you become extinct.

Yes, the U.S. economy is in a recession. Yes, companies are announcing layoffs and the unemployment rate keeps climbing. Yes, it is a very grim picture for U.S. manufacturers, wholesalers and distributors. Yes, necessity is the mother of invention -- or in this case, innovation.

It comes as no surprise that confidence and optimism are sinking among the nation’s wholesalers and distributors. Energy costs continue to rise, which is a disconcerting issue for them, according to a survey by RSM McGladrey.

Eighty-six percent of respondents say that they expect energy costs to increase six percent or more in the coming year. To make matters worse, 80 percent are also expecting increases in costs of operating labor, freight, benefits and raw materials.

“To help offset high energy costs, companies have been changing their logistics and scheduling,” said Robert Jirsa, Managing Director, RSM McGladrey. “They may opt to do some repricing and set minimum order sizes for next day delivery.”

And for employees, the picture is even grimmer.

“When it comes to workforce compensation, many employers are not making wage increases, and those that are say they are choosing only two to four percent increases,” Jirsa said.

Moreover, the housing and automotive industries have been taking a beating lately. Those problems have now spilled over into many distribution companies.

“There is a softening in commercial construction and transportation equipment that will likely carry through 2009,” Jirsa noted.

In response to the challenges ahead, survey respondents have chosen to re-evaluate their growth plans. Forty-nine percent say they will work to increase brand recognition.

Although mergers and acquisitions were a popular growth strategy cited by 48 percent in 2007, only 18 percent of respondents planned to rely on it in 2008.

“The availability of credit is limited,” Jirsa added. “Banks want new business, but they are getting grilled, so not much is getting through. Companies should take a look at their existing inventories and receivables to make sure they aren’t being a bank for their customers.”

Companies are also putting less emphasis on vertical integration, creating private label products, and growing with large retailers.

Distribution companies are increasing their focus on information technology (IT) spending, as they depend heavily on logistics and billing. Eighty percent of respondents say IT is becoming increasingly critical, and 75 percent plan to expand the use and functionality of their existing systems. Distributors seem to be placing more of an emphasis on IT than manufacturers, as just over 70 percent of manufacturers say IT is becoming increasingly critical to their business.

Distributors are also planning to align their IT strategy with their business plan (66 percent), implement new technologies (55 percent), and train employees to use their current systems more effectively (53 percent).

Unfortunately, despite an increased focus on IT, risk management is still a weak point. Nearly 25 percent of respondents don’t have effective disaster recovery systems, test network security at least once a year, or plan to increase their spending on information security.

“Companies are learning to work smarter,” Jirsa said. “They need to pay attention to safeguarding their systems, which they typically only do once those systems are hacked.

Companies are also learning to work greener. Thirty-eight percent of respondents indicated a reduction in non-recyclable waste and 23 percent are eliminating the use of some chemicals.
“Green initiatives are also growing in popularity,” Jirsa added. “Companies are being asked by their customers to adopt green practices.”

Following in the more holistic approach, wellness programs are being used to help bring down healthcare costs. More than 60 percent of companies with over $500 million in revenue say they use wellness programs.

Anything you can do to help cut costs now will increase your chances of making it through a long and deep recession.

“The first and second quarters of 2009 are going to be rough,” Jirsa said. “Maybe the stimulus package could help the third and fourth quarters, but most likely we will have to wait until 2010 for a turnaround.”

Although an economic rebound may still be months away, it is vital that you do what you can to lessen the impact. It’s going to be hard, but not impossible.

“When things get tough, you have to look at where your resources are and tighten your belt,” Jirsa said. “Perhaps you can reduce hours, overtime, or shifts, or spend more time on your most important customers.”

For more on RSM McGladrey’s Distribution Industry Report, click here.