As the electrical industry limps into the second full year of what still feels like a horrendous recession, when optimists strike a match, even they are having trouble seeing light at the end of the tunnel in 2003. Yet, because the industry has been down this road before, you can prepare your company for the eventual climb back to prosperity from the lessons learned during past recessions.
Two quotes from EW's coverage of other recessions put the current economic conditions in perspective:
“However bad the economy was in 1991, it was by no means hell. Hell was 1974-1975 when OPEC unleashed itself on the world; hell was 1981-1982 when the unemployment rate topped 10 percent; the prime rate was 20 percent and the U.S. manufacturing base crumbled.” (EW, December 1991.)
“On a price-deflated basis, sales of electrical wholesalers were down 26 percent for the first seven months of 1975, compared to the first seven months of 1974.” (EW, October 1975.)
Because of inflation and the oil crisis the nation experienced during the 1974-75 recession, and the extraordinarily high interest rates in the 1980-1981 recession, business conditions then were even worse than now. But after each of those recessions, the electrical industry recovered and set new sales records within several years.
The companies that returned to prosperity then — and those that will do so again in the next recovery — are those that time the upturn. Most companies have already done everything they can to weather the recession. They have tightened credit policies, weeded unprofitable customers and unproductive employees, solidified partnerships with the most-profitable customers, thinned inventory, streamlined operations, pared overhead, laid off employees and delayed raises and new hires.
Veterans of past recessions saw trouble before it happened and started the harsh healing process before the herd; the really bright operators will see the next uptick early and begin positioning their companies for growth. Timing an economic uptick is a learned skill, and the people best at it are usually the industry greybeards who have survived a few economic storms.
If you want to read a great article on this topic, check out “Managing across the economic cycle” on the Indian River Consulting Group's Web site at www.ircg.com. Michael Marks, principal, Indian River Consulting and noted distribution industry consultant, said in the article that when you sense business conditions start to improve, you should negotiate terms, pricing and orders for steady-demand products with still-hungry manufacturers.
“Imagine a manufacturer's excitement when the ‘early-reactor distributor’ comes to them with a huge 12-month, noncancelable order phased out in monthly releases. There may be some special terms available because the manufacturer really needs the business. This is high-stakes poker for the distributor, but their bet is probably hedged by good margins and favorable payment terms. The next big orders from herd distributors won't get the same treatment.”
The most important tools for catching an uptick early are the business indicators you have watched every day of your electrical life: days outstanding on receivables; number of line items ordered on a daily, weekly and monthly basis; gross margin per sale; margins by customer; manufacturer shipments; etc.
To provide you a more macro view of electrical construction trends shaping customer demand, Electrical Wholesaling is launching a new department this month, ElectroStats (page 16). This department offers a monthly roundup of trend data for the key economic statistics in the construction and industrial market, including new housing starts, machine-tool orders, the Purchasing Managers Index and construction put-in-place data. EW's editors have designed this new tool to be a quick read that's packed with useful data. We hope you agree.