If your distributorship isn’t working to improve its supplier relationships now, when business is good, it could be in for a shock if the anticipated economic downturn hits within the next three years.
There’s no question that the U.S. economy is in pretty good shape right now. Eleven years after the Great Recession, in fact, nearly all sectors of the economy are plugging away nicely. But economists are starting to see—and talk about—the cracks in the pavement. And while no one can fully predict when the next downturn may happen, the signs are pointing to one taking hold sometime in the next two to three years.
By one measure, more than 75% of economists recently surveyed by the National Association for Business Economics (NABE) expect a recession within the next three years, with about 10% of them foreshadowing a recession in 2019; 42% expecting one in 2020; and 25% predicting that the hammer will fall in 2021. “Concerns are growing about the US economy after the Federal Reserve effectively signaled that it is planning on pausing the monetary tightening path it has embarked on in the past three years,” Business Insider points out.
Weathering the Pending Storm
With 77% of the economists surveyed by NABE forecasting recession within the next three years, it’s time for companies across all sectors to start thinking about what they can do to 1) prepare for the possible downturn and 2) keep their current business pipelines filled and productive. This balance isn’t always easy to achieve when “times are good,” like they are right now, but it needs to happen if distributors are going to weather the economic storm that could be lurking on the near horizon.
“Business is good for most distributors right now, and pretty strong for some of them,” says
Dirk Beveridge, founder of Chicago-based UnleashWD and author of INNOVATE! How Successful Distributors Lead Change in Disruptive Times. Business is so good, in fact, that at some recent business think tanks that Beveridge has participated in companies are talking about the “overwhelming amount of business” that they’re dealing with.
That kind of talk scares Beveridge a little, and mainly because he understands the tenuous nature of the manufacturer-distributor relationships. After all, it was Beveridge who worked with NAED on a comprehensive 2016 industry survey that found that 91% of distributors and suppliers felt the need to reimagine how they work together and collaborate. Specifically, 87% of distributors and 94% of manufacturers felt that their current relationships were out of alignment and in need of help.
That was three years ago, and while Beveridge doesn’t have any hard numbers to share right now, he’s pretty sure those manufacturer and distributor relationship pain points still exist. One of the main culprits, according to B2B e-commerce platform Handshake, is that not all manufacturer-distributor relationships are equal. Some are tactical and some are strategic.
“A key element of success in a manufacturer-distributor relationship is for both parties to be on the same page as to whether the relationship is strategic or tactical,” Johnny Marx points out in The Manufacturer-Distributor Relationship. “This will set the expectations for the type of support both parties give to this relationship.”
For example, a strategic relationship requires closer collaboration from partners in the form of marketing, branding, and product development. “In a strategic relationship, a distributor doesn’t just push product,” Mark writes. “It also provides feedback: customer feedback and insights, possible product improvements, and new products to meet demand identified in the market.”
On the other hand, a tactical relationship is more limited and tends to focus on increasing sales. “Manufacturers build the product and distributors handle the logistics and marketing involved in getting those products into the hands of customers,” he explains. “A tactical relationship is easier to replace, so both parties will likely want to look at how to make the relationship more strategic, else they face the possible loss of a significant source of revenue.”
This can create real challenges when times aren’t so good, and when both manufacturers and distributors are forced to fight tooth-and-nail to drum up new business and retain their current customers. Add the fact that the forces like Amazon Business weren’t even around during the last recession, and the argument in favor of manufacturers and distributors working together as cohesive units gets even louder.
“The fact that people are talking about a downturn is an excellent opportunity to drive the importance of these relationships,” Beveridge says. For example, he tells distributors to work with their suppliers to answer questions like: What will happen if the market does X? And what happens if it continues to do Y? What does this mean for our partnership? And, how can we continue to penetrate the market and look for new opportunities, despite the fluctuations?
Beveridge says another good conversation starter that all distributors should be having with their suppliers right now is: If there is a market downturn, what mindset do we each want to bring to the table, as partners? “That would be an excellent conversation to start having right now, versus later,” he says, noting that even just the premise of a potential downturn can serve as an “excellent catalyst to drive these types of partnering conversations.”
Good Times Camouflage Poor Performance
One of Beveridge’s favorite truisms is, “good times camouflage poor performance,” which means that ignoring a potential downturn will show up on the blissful distributor’s balance sheet pretty quickly. “One day your financials will be looking stellar, and the next day you’ll be saying, ‘Oh no, what happened?’” Beveridge cautions. “At that point, you’ll realize that you were just riding the economic wave rather than focusing on improving your business and your business partnerships.”
The good news is that there’s time to make changes before the next downturn or recession hits. By focusing on continuous business improvements, creating cultures that attract (and retain) new talent, focusing on the future (versus just the here and now), and proactively sitting down with partners to talk about how to work together, electrical distributors can brace themselves for what’s to come.
“Right now, while business is good, distributors have the ability, the resources, and the capabilities to have these productive, strategic conversations with their partners. They can be on the offensive,” says Beveridge. “Unfortunately, the urgency just isn’t there right now due to the very fact that the market is so good.”
In the second article of this 2-part series, we’ll look at why distributors need to keep their customers front-and-center when planning for the next economic downturn.
Tagged with best practices, economy