Counting Expenses

The top business expense for suppliers in 2000 was raw materials, comprising an average of 23% of their total expenses. Production staff payroll came in second at 15%, followed by overhead (10%). 

David Gessner points out that the higher cost of power – electric, gas and such – have made doing business tougher. So far the company is tightening its belt and hoping for the best. “We’ve been cutting expenses internally, being more efficient, saving pennies – even down to where we buy scotch tape. If we can get a better buy someplace else, we do it. Pennies add into dollars,” says Gessner. And for some unlucky suppliers based in California, overhead expenses included investing in backup power sources so employees and lines can operate during rolling blackouts. At this point there’s no end in sight for these energy problems, say California suppliers.

Most supplier expenses were comparable to those reported for 1999, except for a decrease in advertising and promotion (8% in 2000, down from 12%) – usually the first thing to go when the specter of a recession looms. There was also an increase in spending on research and development (5% in 2000, up from 2% in 1999). One reason could be suppliers’ push to diversify – add new products, lines, imprinting processes and art capabilities – to provide distributors with one-stop product shopping. 

“We added many new products in the year 2000, which is the name of the game in our industry,” says Ratzky. “It’s very difficult to see distributors on a regular basis if we don’t have new items to present.” 

Suppliers spent an average of 23% of their capital improvement expenditures on purchasing/upgrading their imprinting equipment, and an average of 4% on the purchase/upgrade of personalization equipment. But they spent the most (27%) on technologies like new computers, Web-site development, etc.

The top capital expenditure for distributors was also technology – computers, Web-site development and the like – drawing an average of 46% of total expenditures. (Tellingly, even middle-of-the-pack distributors spent 25% of their budgets on it.) The cost is dear, but necessary. Jim Tolbert Jr., sales rep for Mal Brogan Co. (asi/146610), says the company purchased additional software to enhance it’s layout and design capabilities and help control the high costs associated with outsourcing clients’ design work.

Brian Gould, vice president, promotional products division of Lloyd Schuh Co. Inc. (asi/321000), says the company’s single biggest annual expenditure for a number of years has been software improvement. The company tries to stay as close to the cutting edge as possible without getting cut. “Our main technology thrust is to make sure our customers – many of whom are technology companies – don’t feel they have to drag up to their level,” he says. “That’s related to making sure we have sufficient bandwidth to take in information we need, that we can handle any program sent to us from a graphic standpoint … that our computers are fast and reliable.” 

At The Distributor’s House

The distributor State of the Industry survey detected large profit increases for a substantial percentage of distributors who diversified their businesses by added services like: 

• fulfillment/warehousing 

• design/graphics

• company store planning/execution

• online purchasing.

Are distributors bringing imprinting and personalization in-house in significant numbers? Not according to this year’s survey. Only 4% of respondents reported adding these capabilities for the first time in 2000. 

And it initially looks like that was a good thing: The average increase in profits for this grooup was a whopping 139%. But hold on; it seems that less than half this group said profits increased in 2000, so the trend is a bit suspect.

“You’d need a big gun to make me bring [imprinting/personalization] in-house,” Brian Gould says. “We always buy our wearables direct and we contract decoration. I’m perfectly thrilled to be a customer to several people and use whomever can do the job that day – if their resources match what I need for the job – vs. being locked into my own abilities.” 

Other distributors share that sentiment. Fuzzy Ducks once considered bringing imprinting and personalization capabilities in-house, but gave that up in favor of close working relationships with a reliable screenprinter and embroiderer. “Obviously, by relying on vendors all the time you can’t guarantee the product will ship on time or be produced to your expectation,” Provetto says. “We feel that’s part of the business, and take every step to ensure this doesn’t happen – including calling the vendor to make sure they received the art, double checking before we submit final pricing to our clients and calling the vendor on a regular basis to make sure the job is on track.”

Staffing: Stretch Or Slim?

The distributor survey detected that for the majority of distributors (59%), staff size remained the same between 1999 and 2000. That’s 10 percentage points higher than last year’s SOI report, when 49% of distributors reported no change in staffing during the previous year. Slight increases were also detected in the median number of assembly/manufacturing/decorating employees, full-time salespeople, human resources staff, independent contractor salespeople, quality control employees, sales support staff and technological staff at distributor firms. The number of staff in other positions remained constant.

On the other side, supplier staff size fell dramatically, with the median number of employees falling from 44 in 1999 to 15 in 2000. Supplier companies in the medium and large sales volume categories ($500,001 to $2.5 million and over $2.5 million, respectively) experienced the most significant falloff in staff size, probably because these are companies large enough to have “extra” people 
on staff or have trouble filling empty positions.

To some, the decrease in supplier staff size isn’t surprising. “It’s the way it goes,” says Dan Townes, MAS, president of Shelbyville Pencil Co. (asi/86850). “There’s always price and pressure and in order to compete you have to be more efficient – and being more efficient often means less people.” 

Among suppliers who reported a profit increase in 2000, the largest group (49%) reported their staff size remained the same. Of those suppliers whose profits decreased, only 11% increased their number of employees, and the majority (42%) cut staff size. Although these numbers should be taken with a grain of salt since only a cross-section of firms were surveyed, profit decreases might still be connected to company layoffs (remaining employees tend to become demoralized and less productive), a depleted and overworked workforce and the hiring of less experienced workers.

Typically, the largest group of workers at a supplier company is in the production area. Our survey shows suppliers had a median of 11 production employees in 2000. That area experienced the most significant staff-size decrease for suppliers, down from a median of 20 production employees in 1999. 

Though staff numbers in general for suppliers were down, there was an increase in the median number of contract salespeople – up to four from just one in 1999. Other increases were seen in the number of full-time salespeople and part-time salespeople. The increasing number of supplier salespeople may provide a clue as to why the SOI survey’s supplier respondents said industry growth was robust in 2000.

A Temporary Cure

Plunging staff numbers at supplier companies can probably also be traced to temporary unskilled labor – part of the basic nature of manufacturing. “Suppliers use temporary employees in upsurges of business,” says Jim O’Boyle, executive vice president of Timeplanner Calendars Inc. (asi/91340). When they don’t need them, the temporary workers are let go. In 1999, business was surging ahead and suppliers needed the extra hands, O’Boyle says. But when the slowdown came in late 2000, the workers weren’t needed and were let go. 

“It’s easy to take on temp workers for additional help,” says Townes. “When you don’t need them anymore, you just send them back. There’s no obligation – you don’t have to pay unemployment or worry about any other issues. Now that there’s a slowdown, suppliers don’t need as many helpers.” 

Townes says technology and the natural attrition of staff are two reasons staff size has decreased at Shelbyville. “As people leave or retire we’re not refilling those positions because those jobs don’t exist anymore,” he explains. “And as more and more intelligence is taken up by automation and technology, more and more of the positions are disappearing.” 

Tight Labor Market

Unemployement figures may have risen slightly, but both suppliers and distributors say they experienced difficulties hiring employees. “Our major problem at this time is trying to increase our sales staff,” says Ratsky. And he’s not the only one.

This year’s SOI survey found the top reason for an increase in distributor profits was “hiring salespeople” – that is, if you can get good ones. “The hardest thing to find is a competent salesperson,” notes Rosalind Boukis, CEO of Advertising Magic Inc. (asi/111425). “I would have hired five salespeople this year if I could have found them.”

Sales isn’t the only area with empty positions. “It’s been very difficult to find even a qualified order-processor,” says Gary Gwynn Sr., president and owner of Gwynn Advertising (asi/216680). And it’s a problem they shouldn’t have, he says, because of rising unemployment and the economically depressed conditions in West Virginia.

Townes feels the recent prolonged economic boom has spoiled much of the younger labor force, who expect unrealistic pay. “When you have kids coming out of college and making $70,000 to $80,000 a year, you can’t compete if you’re paying $30,000,” he says. But there’s hope right around the corner, he adds, when the market price for labor settles: “They’ll fall back to Earth soon enough.”

The Training Myth

Some companies find success in hiring and training workers from outside the industry. “We’ve found greater success outside the industry and training our people ourselves,” says Bryce Davis, president and CEO of American Graphics (asi/35460). “The returns have been tenfold, with our focus on the two objectives of both training and maintaining staff.”

The benefits of training, says O’Boyle, are that trained employees have more confidence with customers and are more apt to stay in their jobs, while the company benefits by having workers who are able to think on their feet. Boukis adds that training helps employees who are new to the industry get over that crucial first year’s learning curve.

The irony is that no matter how useful it is to train employees, our surveys often find many respondents spent nothing on it. It’s one of the more financially unsup-ported aspects of a distributor’s operations. The average company wide expenditure for employee training in 2000 was slightly more than $1,300, but the median came in at $0. For sales training, the average expenditure for distributors was close to $6,500, but again, the median ($100) may be a more accurate benchmark. 

On the supplier side, the average dollar amount spent on sales training was an equally paltry $1,900, also with a median of $0, so at least half of supplier respondents said they spent nothing on sales training. The average spent on employee training was just above $4,600, with a median of $300, showing that a supplier’s employees are generally better off than its salespeople when it comes to training and development. Judging from the median dollar amount on both sides of the industry, whoever said, “People are our most important asset” was probably just paying lip service to the idea, says Dr. Marjorie Cooper.

Lack of training is a common – but highly avoidable – management mistake. Training can and should be regarded as an investment in the future of the business. According to Davis: “The more you spend in training, the more you get back in the following years.”

Cynthia Ironson is the features editor and Josh Vasquez is assistant editor of The Counselor.