If you’re restless, speed up. If you become winded, slow down.” That’s the way Robert
Pirsig, author of Zen and the Art of Motorcycle Maintenance, recommends climbers approach a mountain. “You climb the mountain in the equilibrium between restlessness and exhaustion.” When the proverbial mountain is a challenging economy, the same advice can be applied to the operational management of companies.
Indeed, both suppliers and distributors appeared to take a Zen approach to persevering through what has been an insurmountable time for some other industries. Rather than panicked belt-tightening or slash-and-burn solutions, the majority of our State of the Industry respondents have either held steady or adjusted their stride with more measured steps.
Most say “we haven’t really changed anything” to achieve cost-savings. Of those respondents who did take some steps, 68% of suppliers and 54% of distributors note they “just tried to be more careful about our spending.” That doesn’t reflect the major cuts or downsizing we’re seeing in circles outside promotional products. Yet it has proven effective – these approaches were associated with industry firms having healthy gross profit margins. Others have sped up their operational ascent, adding capabilities and staff to get ahead of “resting” competition.
For a closer look at various operational approaches to see what companies were doing in 2002 to climb the mountain and come out on top, let’s first review the supplier side.
Suppliers: ‘How Can We Do Better?’
Bill Galey, specialty advertising manager at Zippo Manufacturing Co.
(asi/99070), voices the challenges the current economic environment has presented: “The downturn in the economy has affected us greatly with all of the business closings, layoffs and budget cuts. We’ve experienced almost a 20% decrease in our promotional products business over the last year and a half. I think it has made us all sit back and take a look at the industry and try to find new ways to increase our market share. How can we do things better and improve our efficiencies so that the distributors will want to sell our products?”
Adjusting their “pace” to today’s economic reality hasn’t necessarily meant slowing down operations. “Zippo hasn’t really tightened our belt at all,” Galey says. Instead, the supplier has plowed ahead with significant operational improvements, changing its sales distribution policy by opening it up, introducing 55 new products along with new imprinting methods, as well as reducing lead times, adding a new Web site and hiring additional sales-associate and customer-service personnel. “The result, through the first four months of this year, has been an increase in sales of 48%,” says
Galey.
But outside pressures can’t help but cause some supplier managers to look carefully at operational expenditures. “We’ve seen a trend toward lower price points, smaller orders and less lead time [with] decision making pushed back,” says Sharon O’Connell, vice president of operations at Leed’s
(asi/66887). “All of this has created an increased burden on the operation to achieve the same revenue dollars. In addition, we’ve seen continued pricing pressure. The increase in focus on costs has heightened the need for all participants in the supply chain to evaluate value-added and non-value-added activities and increase efficiency.”
‘The Key Is Technology’
“Increasing efficiency” is often a euphemism for doing more with fewer employees. The thing is, our statistics suggest that, overall, suppliers are maintaining – even increasing – their troop levels. For the second year in a row the average and median number of employees has increased, up to 69 and 20, respectively, in 2002 vs. 55 and 17 in 2001. The largest group of suppliers (35%) have 10 employees or less; the next largest grouping (27%) have more than 50. Who’s most profitable? Suppliers with 26 to 50 employees have the highest average gross profit margin at 34%.
However, not everyone can build their staff in tough times. In fact, one-third of supplier respondents say they had to cut the size of their staff, making other operational adjustments imperative. “The key to doing better business with a smaller staff is to keep up on technology,” says David Porter, general manager at Sportsman Cap Network (asi/88877). “For example, about 30% of our ordering is done on the Internet. We’ve created an online system that works quickly and efficiently, while reducing the manpower required to fill orders. We’ve had to rely more on available technology because it doesn’t make sense to expand our staff. We’ve also had to cross-train the staff we have, increasing efficiency and communication. So far, it’s working well – we’re meeting or exceeding our goals in nearly every area.” |
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SOI Data-Mining
A Really Touchy Subject
Nearly 80% of distributors are purchasing at least some of their products from suppliers outside the promotional products industry. The average share of total sales volume is only 11.65%, but 11% of distributors say 25% or more of their sales volume comes from outside suppliers.
How does outside buying affect other behavior? Well, for distributors who generate more than 50% of their sales volume from outside suppliers, the amount of business they moved to new suppliers averaged much less than all distributors – $24,431, compared to the overall mean of $58,571. Those who are doing most of their business with suppliers inside the industry have moved quite a bit more business around to new suppliers, indicating less satisfaction within the industry than with suppliers outside the industry.
– Dr. Marjorie Cooper |
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‘Companies Won’t Spend The Money’
Certainly, doing more with less isn’t without its costs. The irony is that achieving such efficiencies often means capital outlays. The median amount spent on capital improvement by suppliers remained steady at $5,000 between 2001 and 2002. Broken out by company size, the average was $10,792 for small suppliers, $36,683 for mid-sized firms and $206,913 for the largest companies. That’s not exactly chump change, though some did say they were engaging in cost-saving measures by postponing renovation of their facilities (11%) or the purchase of capital equipment (24%). Those who did postpone were also more likely to have lower gross profit margins, perhaps suggesting that investments which could have improved efficiencies or reduced lead time might have instead bolstered their bottom line.
It’s a dilemma; caught between being proactive and conservative. One perspective is that the race belongs to the swift, which mirrors Galey’s viewpoint: “A lot of companies won’t spend the money to make capital improvements and invest in their future. They’re waiting for the economy to turn around, and they’re the ones that will be left behind.”
Statistics do suggest that proactive measures can have a positive effect. Some of the most profitable companies – those with a higher-than-average gross profit margin of 35% – say they have increased their production capabilities in the last year.
Others, however, build a case for the positive effects of restraint. “I think the economy is forcing suppliers to become more efficient with the resources they already have,” says Porter. “And that’s not entirely a bad thing.” In fact, 12%
of supplier respondents rate improvements in management efficiency as having the greatest effect on their profitability in 2002.
‘Improve Efficiencies And Lead Times’
Where suppliers ultimately put their money is usually dictated by distributor needs. “The biggest demand that’s been placed on us is [for] reduced lead times to accommodate their customers’ needs,” Galey says. “In order to do this, Zippo has hired additional personnel and purchased new imprinting equipment to improve efficiencies and lead times.”
Some of the areas Leed’s has addressed also stem from distributor relations. “One example is our new artwork processing system implemented last week, which allows us to receive and perform initial evaluation on artwork four times faster than we used to be able to and provides our customer service personnel with more complete and timely information,” says O’Connell. “It also helps us match orders and artwork much more quickly. This is a great example of a project that has dramatically improved our internal efficiencies while providing our distributors with better service.” |
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SOI Data-Mining
At Your Service
Responses to this year’s SOI survey showed a marked increase in the percentage of distributors who offer various services. These include
warehousing/inventory management, imprinting/personalization, company store/catalog programs, fulfillment and complete sales promotion agency services.
Digging deeper, we find that distributors who offer Web-based promotion/design have the highest average gross profit margin, as well as a rather striking average sales volume increase of more than 58%. Those who do ROI tracking for clients have a much higher than average sales-per-client figure – $15,357, compared to an average of $7,580 for all distributors – and they also had higher than average sales volume increases (45.7%) in 2002.
– Dr. Marjorie Cooper |
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‘It Isn’t As Easy As They Thought’
Of course, no discussion of service would be complete without examining suppliers’ inventory, production and sourcing capabilities. One-third of supplier respondents say they held steady on the amount of stock they inventoried in 2002, while approximately 20% actually reduced the amount of product they stocked. Not surprisingly, the largest group of suppliers (49%) say the demand for inventory services stayed the same. Half of suppliers increased their production capabilities in 2002. And the average turnaround time on the majority of suppliers’ products was 12 days, on average (median 10), despite the fact that more than one-quarter of their orders require turnaround of five days or less.
The number of suppliers importing products from other
countries was down slightly to 51% (vs. 58% in 2001). But the competition may be stiffening. “We’ve come across more cases of distributors trying to go overseas direct,” says O’Connell. “However, I think many are finding that it isn’t as easy as they thought.”
She provides the following example: Recently, Leed’s was “competing” with a distributor’s internal direct-sourcing group for a large import project. In the end, the supplier won the order due to the salesperson’s comfort level and experience with the Leed’s direct import program, “in addition to the fact that we beat their internal team on price,” O’Connell adds. “As a supplier, we’ve focused our efforts over the last several years on building our logistics, sourcing and quality functions overseas. We have significant investment in structures, people and systems that have taken years to build.”
Distributors: ‘We Had To Cut Costs’
Distributors found various ways to meet the challenges of an unstable market in 2002. Some found their efforts paid off, helping them garner more clients and increased sales and profits.
Others were just glad to make it out alive.
The majority of distributors (59%) say they didn’t make any staffing changes in 2002. However, this number is down slightly from a year earlier (62%). Conversely, a few more companies (16% in 2002 vs. 15% in 2001) cut employees, and the number that added people remained constant at (21%).
Laying off employees or eliminating positions is a decision not taken lightly. But when times are slow, personnel is one of the first things that’s evaluated. “It’s not the kind of streamlining that you want to do,” says Kristine Kurey, chairwoman of Kurey Co. Inc. (asi/246590). “We had to cut costs to get in line with the lower sales and profits we had. There wasn’t enough work for those people; when I laid them off there was just enough work for the people who were left.”
And even after staff cuts are made, companies tend to expect more from those who remain. “We reduced staff, basically tightened the ship and assigned more multitask jobs to the same person,” says Tim Hennessy, president of Concepts & Associates Inc. (asi/166235), adding, “we’ve become more efficient, and our sales actually increased last year.”
‘Processes Flow A Lot Smoother’
For the most part, distributors seem ready to give employees the preparation they need to handle added responsibilities. Overall, they spent an average of $2,651 on employee training in 2002, down slightly from the $2,872 they spent in 2001 but still nearly twice what they laid out ($1,388) in 2000. When we look at the full range of responses, however, we find the majority of distributors (53%) spent $500 or less on training in 2002, with 28% spending between $1,001 and $5,000. Only 4% spent more than $5,000.
As a distributor that invests heavily in employee training, Brand Fuel (asi/145025) has a comprehensive program in place, says Vice President Danny Rosin. Employees have an intensive two-week orientation, learning what they need to know to do their own jobs, as well as a few things that will help them better understand what their co-workers and suppliers do as well. For example, salespeople experience imprinting processes first-hand. “They go on field trips to screenprinting shops, embroidery shops, etc. We let them actually screenprint or embroider,” explains Rosin. “If we can teach a salesperson why it can be difficult to print on dark shirts, they might not sell that more difficult print. Or, if they do, they’ll understand going in that there’s some potential [for] resolution error.”
Brand Fuel takes it a step further by training its salespeople on graphics software so they better understand the process and can even make some minor changes. “We’ve invested in that so they have a better understanding of art, which is a huge bottleneck in our industry,” Rosin notes. “Salespeople who don’t understand art can be in a world of hate because their customers are frustrated and suppliers are frustrated. We feel like if we train them they’ll be more educated, we’ll get more business and processes will flow a lot smoother.”
And good training ultimately translates to companywide success,
Rosin adds: “It comes down to attracting good people. Everything is related in one way or another. If you’re successful and you do things the right way because people have been trained correctly, success continues to grow and you’ll attract even better people.” |
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SOI Data-Mining
You’re Our Favorite Vendor
The belief that preferred vendor relationships give distributors buying power and offer suppliers a more stable, loyal customer base (as well as higher profitability) has been around a long time in the promotional products industry. This year we looked more closely at the data to see if the touted advantages are reflected in reality.
Distributors are virtually neutral on the effects of preferred vendor relationships, reporting stronger effects for mid-sized distributors ($500,001 to $2.5 million in sales volume) than small or large distributors. Those who report a strong effect also reported higher-than-average gross profit margins, but there seems to be no correlation between sales volume increases and preferred vendor relationships.
Suppliers put even less stock in preferred vendor relationships than distributors. While 37% of distributors say these relationships have a “somewhat” or “strong” effect on their business, only 22% of suppliers say the same. Yet, for those distributors who are fully engaged in preferred vendor relationships, gross profit margins are higher. Could it be that these relationships work better from the distributor’s point of view than from the supplier’s? Are suppliers merely experiencing more pricing squeezes rather than the loyalty they hoped to achieve? We need some feedback on this one. What have you experienced?
Outline your experiences and comments in an e-mail and send it to
feedback@asicentral.com.
– Dr. Marjorie Cooper |
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Blankety Blank Blanks
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| The average percent of distributor sales volume in
blanks to be imprinted in-house |
45% |
| The average percent of distributor sales volume in blanks purchased to be outsourced to third-party printer |
42% |
| The average percent of supplier orders in outgoing blanks |
13% |
Source: The Counselor; annual State of the Industry survey. © 2003. |
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 ‘It Actually Saves The Customer More’
In 2002, some distributors searched out success by exerting more control than they had in the past. A larger percentage (39%) reported doing at least some in-house imprinting/personalization. This was up dramatically from 2001’s 29%
and 2000’s 28%. Not surprisingly, some say they’ve taken on the extra work – and extra responsibility – to better control quality and turnaround time.
Fort Worth Promotional Products (asi/196482) was tired of working by other companies’ timetables, so it added embroidery and screenprinting equipment in 2002. “We bought machines the first quarter of 2002 because of the lack of control over production time,” says Danny McGuire, president/owner. “Part of our strategy to do more business was getting jobs turned quickly, and we weren’t able to do that sending embroidery and silk-screening to outside vendors.”
The investment paid off, increasing FWPP’s business and even saving its customers some money. “Before, we were charging for digitizing setups for logos; we quit charging when we started doing it in-house and we lowered our prices on set-up charges on silkscreening. So it actually saves the customer more,” McGuire says. “We probably increased our business at least double by bringing the work in-house.”
As a company that already offered in-house imprinting on wearables, Custom Logos (asi/173183) broadened its services further by adding fulfillment in 2002. It started by offering the service to one client and has since expanded it to include about seven accounts. “It’s a terrific program, even though we
hadn’t done it in the past,” says Ryan Kaback, the firm’s ASI product manager. “It was completely new to us, so we researched it and we basically had to create an operation for it.”
‘We Stopped Using Them’
Distributors continued to scrutinize the suppliers they worked with in 2002; 93% say they stopped using at least one supplier last year. Of those who dropped at least one supplier, 30% cut only one, 60% dropped two to five, 11% dropped five to 10 and 3% say they dumped more than 10. The primary reason? Peak Promotional Group LLC (asi/292461) stopped using a particular supplier because they were unhappy with the company’s service. “We stopped using them after giving them a purchase order and then finding out the actual item wasn’t in stock – we had that happen a couple of times,” says Dennis Leary, president/CEO. “That seems to be a pattern with some of the suppliers, so we’ve taken them off our list. I can understand one or two mistakes, but there’s a handful of suppliers that we will not use, period.”
Other distributors, like Kurey Co., shifted orders to fewer suppliers to save time and money. “We wanted to consolidate suppliers so we would be able to get more done in one phone call as far as order tracking and getting work done on the projects we were currently working on,” Kurey says. “And then, when it came time to pay, we had fewer checks we were cutting.”
‘A Lot Of It Is Customer-Driven’
Even though they have no kind words for suppliers who fail to follow industry protocol and instead sell direct to end-buyers, distributors aren’t afraid to look elsewhere if they can’t find what they want from industry suppliers. A large majority (85%) of distributors say they used nonindustry suppliers in 2002.
Still, the amount of business they do with suppliers outside the industry is relatively small. The average percentage of orders funneled through nonindustry suppliers was 12% in 2002, with 74% of respondents saying it amounts to less than 10% of their business; only 11% of respondents sent more than one-fourth of their business to outside companies. The main reason they do it? The most popular response is the most obvious: “able to find unique products not offered by industry suppliers” (cited by 38% of respondents).
Distributors are also importing products more than they have in the past. Nearly one-third (31%) say they sourced products overseas last year vs. the 23% who did so in 2001. When large orders are involved, some distributors automatically look overseas. “A lot of it is customer-driven and has to do with quantities we’re asked to present,” says Hennessy. “A lot of folks stateside don’t have those types of inventories at hand.” |
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SOI Data-Mining
Client-Intensive Companies
We profiled distributors who served 500 or more clients during 2002 and discovered some interesting facts about these “client-intensive” companies. They retain slightly more of their clients than the average distributor, and they serve many more new clients – an average of 302 vs. an average of 64 for all distributors.
Their average annual sales per client, however, is much lower ($2,903, compared to an overall average of $7,580), and they do slightly less of their total business in promotional products (71% vs. 75% for all distributors).
They also process many more orders (5,256 vs. 1,442 for all distributors), and their gross profit margin is slightly higher than the norm (34.4%, compared to 33.9%. They average 10 full-time salespeople compared to an industry mean of 3.7 salespeople, as well as more part-time and independent
contractor salespeople. These distributors also tend to sell smaller orders to many customers rather than developing large programs with just a few customers.
We asked distributors whether they’d taken “measures beyond your normal efforts to retain current clients and/or get a larger share of their promotional dollars.”
What are some of the characteristics of those who took extra measures? These firms do slightly more of their business in promotional products. They have higher gross profit margins, but their
overall selling and administrative expenses are also slightly higher. They also moved about twice as much business to new suppliers as those firms that didn’t take extra measures.
They’re more likely to maintain a database and more likely to use all types of database tactics; they view their best clients as those who “are willing to pay a premium for their creative services,” and they tend to be in the medium or large distributor category rather than in the small distributor category. They were also more likely to report profit increases during 2002, perhaps an indication that going the extra mile for clients pays off.
– Dr. Marjorie Cooper |
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‘I discontinued using certain
suppliers in 2002 because…’ |
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…of poor quality products/imprinting |
22% |
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…customer service wasn’t helpful |
21% |
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…of inaccurate orders |
11% |
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…I found better prices elsewhere |
9% |
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…orders arrived late/later than promised |
9% |
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…I implemented a preferred vendor program |
4% |
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…lead times were too long |
3% |
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Other* |
21% |
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*Other includes problems like credit/payment experience, exorbitant shipping costs, poor management, direct selling and limited product selection. |
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‘I used nonindustry suppliers last year because…’ |
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…they had more unique products |
38% |
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…I use local vendors whenever possible |
19% |
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…they had better pricing |
15% |
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…they offered faster service |
4% |
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…they were more dependable |
3% |
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…I didn’t; we never use nonindustry suppliers |
15% |
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Source: The Counselor; annual State of the Industry survey. © 2003. |
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Was It Enough?
Now that the tough year of 2002 is behind us, suppliers and distributors alike hope the changes they’ve made will translate into a much more successful 2003. Still, some will undoubtedly wonder whether they could have done more.
“A crystal ball would be great,” Kurey says. “If I had known early in 2002 that the entire year would stay difficult, I would’ve made even more significant changes early on.”
Tonia Kimbrough is contributing editor and Karen Akers is associate editor/multimedia for The Counselor.
You can reach them at tkimbro757@comcast.net
or kakers@asicentral.com. |
