June, 2009

Dealers And The Housing Crisis

Reactions Offer Glimpses Of Both Forward Thinking And Procrastination

By Bill Lee

In 1972, my old company made its first lumberyard acquisition, giving us two stores in the same town. When we acquired this $6 million yard, it was by far the largest lumberyard in our community, and with the acquisition, we inherited a credit policy that called for the company to carry builders until the sale of the house. Average collection days exceeded 100 days.

Intellectually, we knew that it was not good business to sell building materials to home builders with such liberal terms of sale, but we lacked the courage to correct the problem. After all, the seller had operated the business for several decades with the same A/R policy and had suffered few losses. Then 1975 came along. Housing sales plummeted and our customers had dozens of spec homes sitting unsold.

To make a long story short, we lost $2-1/2 million in bad debts, but we did learn a valuable lesson. After taking this kind of loss, we changed our terms of sale to 2% / 10 days. Following the change, our average collection days dropped to around 38 days and remained there for as long as we owned that business.

2007 – 2008

Roll forward 32 years and we see evidence that history does repeat itself. From annual housing starts in excess of two million, new construction in many markets—most notably large booming metro markets— has dropped to a trickle. Virtually all of us connected in any way to the housing market have been significantly affected.

A couple of weeks ago, I asked my weekly electronic newsletter subscribers to answer three questions concerning their experiences with the housing crisis:

THREE QUESTIONS

1) In hindsight, what action do you wish you had taken in 2008 that you failed to take?

2) In hindsight, what action steps did you initiate in 2008 that you’re most proud of?

3) What has been your best money-making idea over the past 15 months?

THINGS I WISH I HAD DONE IN 2008

DEFENSIVE MOVES

In business like in sports, it’s almost impossible to win without a strong defense. And when the market begins to tumble like it did a couple of years ago, the first call to action for the prudent manager is to convert to defense before the red ink starts flowing. In other words, preserve cash at all costs.

I suggested to my clients whose businesses were hemorrhaging cash that their first objective should be to play an aggressive game of defense until they reach break even. Once break even is reached, then, and only then, is it time to begin focusing on offensive strategies. (see Break-Even Analysis on page 20)

On the subject of defense, the most frequent answer I received to this question was along the lines of, “I wish I had not waited so long to cut overhead. I simply lacked the courage to do what down deep inside I knew I should do. We just kept thinking that [the housing depression] was a temporary phenomenon that would correct itself any day.”

Another manager said, “We should have cut expenses earlier. We hung on too long hoping for a miracle. In hindsight, we should have pulled the trigger on a store closing, but decided to ‘wait and see.’ We should have sold excess equipment before the market plunged. We wish we had been more aggressive with our vendors by negotiated deeper pricing concessions.”

A manager from the Northeast put it this way: “We should have gotten rid of the employees that weren’t carrying their weight or who were the cancers of our store: bad attitudes, complainers, and poor performers. Now that we’ve had a little bit of a slow down these guys really stick out, and we are doing now what we should have done a long time ago, and that is replace these poor performers with new employees who are efficient and productive.” “I could kick myself for failing to follow my instincts when it came to lackluster salespeople,” wrote another manager. “Looking back, I was right 90% of the time. I should have let poor performing salespeople go to free up resources for “hunters.” My old complacent dinosaurs that had lived off the boom days have lost their skill to hunt and kill prey. I’d hire more hunters who hunt with passion and love to sell."

The second most frequent answer had to do with credit management. “I wish I had gotten tough on credit and collections sooner. We allowed our builders to dig such a deep hole for themselves that there was little to collect when we finally faced the reality of what was happening in the market.” love to sell.”

MOST PROUD OF IN 2008

GROSS MARGIN

One manager submitted this idea, “I did purchase your [Bill Lee’s] Gross Margin Home Study Course, but I wish I’d gone one step further and hired Chris Rader [of Rader Solutions] to help me use my computer system more effectively. With your ideas, we raised our ‘margin’ by over two points, but other dealers I’ve spoken with that used both you and Rader,  saw a three to four point [gross margin] improvement.”

“We became super aggressive at going back to our carriers and asking them to rebid insurance renewals. We were able to cut cost well over $100K.”

“We implemented bi-monthly company- wide ‘town hall’ type meetings with all employees to share financial information, provide prospective and improve focus.”

“We acquired the land adjoining our present location for expansion when the housing market turns around.”

“I’m most proud that we started an installed new construction window and door program that has been very successful. In addition, we are installing replacement windows and doors and giving our gross margin a much needed boost.”

“We established very specific expectations for new salespeople we hired and didn’t budge from it, which decreased spin up time.”

“I’m really proud of the process improvements we made in both production and administrative areas we modeled after Toyota methods that included more open communication with key managers with regard to planning and analysis.”

“I got out of the office and rode with the outside salespeople, which proved to not only be very interesting, but we also gained a lot of credibility and sales.”

“I made prospecting and tracking new customers my number one priority, which led to an increase in sales in 2008 of 8%.”

“We were successful at getting credit card payments on some old past due accounts, which saved us quite a bit on bad debt expense.”

“To eliminate the annual loss of more than $50,000 to weather-related depreciation, we invested in two new large lumber sheds that enabled us to keep all of our lumber dry and out of the sun.”

“By closing a satellite store on Saturdays for the winter with a staff of just three, paying no overtime and maintaining customer satisfaction, the store made a profit in January 2009.”

“I’m most proud of acquiring a third location and locking in the financing before the spigot closed.”

BEST MONEY-MAKING IDEAS

“My best idea was hiring high performance contractor sales reps that have become available in our market. All of these guys have [contractor] relationships they were able to bring over to us.”

“We made use of the Website, craigslist.com, to clean out obsolete inventory and equipment.”

SPECIAL ORDERS

“We asked all customers (cash and charge) to pay for special orders prior to our placing the order with the vendor. Purchases under $1,000 must be paid in full upfront; if over $1,000 we required a 50% deposit.

“This decision greatly improved our cash flow and motivated customers to pick up special orders a lot more quickly or authorize delivery much sooner because they have already paid for them. Getting special orders out of our warehouse sooner not only freed up warehouse space, but also substantially reduced damage.

“The final benefit is making it much more difficult for a customer to back out of a special order purchase when it has been paid for in full or a 50% deposit has been paid. Overall, this move saved us a lot of money, reduced expenses and allowed us to put more dollars on the bottom line.”

“We took a seasoned inside salesperson off the counter and set up a desk right in the middle of our display area. How often have you seen special orders trying to be sold and written up at the counter when other customers are trying to check out? There was just too much confusion and mistakes too easily made. Now as customers come in to look at flooring, kitchens, even ceiling tile, Tracy is right there to assist and offer pricing and a delivery date. Last month, our special order business went from 25% of total sales to 33%.”

“Last year, we began billing all special orders the minute they hit the dock. Just about everyone in our company opposed the idea, but our people executed it perfectly and I am positive this decision has been a huge help in cash flow, warehouse space, and especially monthly sales.”

“Going through a gross margin analysis on all special orders made us realize that our salespeople had gotten into the habit of selling special orders at ridiculously low margins.”

“Industrial accounts: I have a full time person just calling on industrial business. In our market, no one but the “box stores” are doing this and they are neither competitive nor are they able to service customers to the level we can.”

“We got two people certified for the [government backed] Energy Star initiative and have gained a lot of new revenue and added some good customers because of our ability to certify.”

“Although not a new idea, it was new to us: we opened up our complete financial statements on a monthly basis to help our employees understand where we were financially. It was the first time most of our people had ever seen a corporate financial statement. This has made our team much more conscious of controlling expenses and improving revenues.”

“We invested in sales training for our salespeople, especially in how to deal with pricing issues. In the past, our salespeople just caved in when a customer or prospect balked at our prices. Now, they know how to respond, what questions to ask and do a better job of holding onto quoted prices. As a result, our gross margin is up by four points.”

“While I personally believe most of this push to ‘Green’ products is a bunch of bull, it sure is profitable. Customers who have become obsessed with anything ‘Green’ will gladly pay extra for eco-friendly alternative products. Our gross margin on these products is substantially higher.”

“Cross-training our staff has paid handsome dividends. The great cost saving effect has been in having a fresh set of eyes looking at each procedure and suggesting ways to do a better job of automating the process, perhaps eliminate the procedure or realize that it is a duplicate procedure.”

AGGRESSIVE SALES MANAGEMENT

Now is the time to initiate a proactive sales management program.

Organizations that are growing market share are those that are holding their salespeople accountable for measurable results, and the most effective way I’ve found to accomplish this is to hold regularly scheduled one on one meetings with each member of the sales team.

Begin by listing by customer each major product category your customers are not purchasing from your company and ask each salesperson to find out specifically why the customer is purchasing these products from the competition. Next, ask if the customer is willing to commit to purchase these products from your company.

Secondly, list each creditworthy prospect in your trade area and assign several prospects with good potential to each salesperson. During each one on one meeting, follow up with the salesperson to learn what action has been taken with each prospect and brainstorm the next step to get your foot in the door.

An effective sales program is best accomplished through a team effort between the sales force and whoever the salespeople report to. It is management’s job to make sure that the agreed-to action steps are carried out in a timely manner.

When housing rebounds in your market, make sure that your organization is in the best possible position to take advantage of each sales opportunity. Now is the time to hone your salespeople’s sales skills to win the battle for business in your market.

Final thought: Don’t look back! Look forward and make the best of each opportunity that presents itself.

BILL LEE has nearly 40 years of experience in the construction supply industry. A consultant and seminar leader, he is the author of two books: Gross Margin and 30 Ways Managers Shoot Themselves in the Foot. www.BillLeeOnLine.com, 800.277.7888.