PERSPECTIVE: Petterson: Change to Do More With Less

Jason Sandefur

Can you really afford to keep operating the way you have in the past? Scott Petterson challenged conferees at a series of seminars.
Step back and take a look at your business. What�s in your warehouse?
If you�re not sure, chances are you�re not managing your inventory to maximize cash flow, Petterson told the Western Association of Fastener Distributors.
Now a consultant, Petterson was president of Spokane, WA-based Fasteners Inc. from 1986 to 2000.
�It sounds like a good problem to have,� he said of well-stocked shelves to meet numerous customer demands.
But some businesses don�t believe there is such a thing as �too much inventory. They think that sooner or later someone will want what they have.�
Not true, Petterson emphasized. Inventory is mostly a burden.
Neither factories nor customers want the excess goods laying around, leaving distributors holding the storage bill. In this situation, distributors wind up sitting on their assets, tying up critical cash that could be put to better use.
Controlling inventory is critical, because it involves the most amount of money. �It�s the biggest investment that most fastener businesses have,� Petterson pointed out.
A certain amount of obsolete inventory is inevitable, Petterson acknowledged. Customers change orders or reduce their own inventory. He suggested distributors take a long look at how much of their inventory is relevant to current customer demands.
�Every fastener business has about 25% of stock in inventory that isn�t going to sell.�
Petterson�s suggestion? Sell it for scrap. Sell it to a surplus sales company. Give it to charity, or discount it to customers. He ventured that distributors are better off cutting their losses than carrying excess.
That kind of thinking isn�t necessarily widespread among distributors, because the industry retains a �Mom and Pop� atmosphere, with approximately 85% of businesses having no more than $2 million in yearly sales.
�The fastener industry is not dominated by financial wizards,� Petterson finds. �Many distributors broke into the business with a small operation, limited capital, a family atmosphere with a few employees, and were dominated by sales.�
�Most owners of fastener industry companies are weakest in financial knowledge,� Petterson finds.
Their formula for starting a business is not one Petterson would recommend for growing a business.
Growth is sometimes the result of luck, but most sustained growth blossoms out of a solid business plan, he emphasized.
Petterson suggested that all business owners should question the value of how they operate. If it doesn�t enhance the capability or profitability of your company, it doesn�t make much sense to do it. There are numerous tools available to help estimate the profitability of each transaction.
�Reducing cost is another way to keep the bottom line afloat.
�Business owners should renegotiate interest rates on debt whenever possible.
�Ask tough questions, such as �Are we capable of withstanding a 10% to 20% loss in sales this year?�
Rent, payroll, and the cost of utilities have all risen in recent years. Combine those increases with a slip in sales and you could be in for a rough ride.
Petterson speaks from experience. While he was president of Fasteners Inc., the company experienced a 15% drop in sales in 1998. They ended up losing money that year, he says, in part because the decline was unexpected.
That�s why he stresses the importance of running pro-forma business situations (worst case scenarios). It�s hard to prepare for the worst if you�ve never considered it.
Petterson cautioned against having accountants run your business. �It�s dangerous to wait for your accountant to say if you�ve made money or not. At that stage it�s usually too late to turn the situation around.
There are other ways to reduce costs, such as negotiating a rent abatement, subletting the unused portion of your warehouse, and using time-saving technologies, such as e-mail instead of fax or phone. And distributors should manage utility usage (thermostat, electricity, etc.).
Controlling costs sometimes includes trimming the workforce. Petterson says economic survival requires a �back to basics� approach to sales. Outside salespeople are generally expensive, so many managers are now getting involved in sales to consolidate territories and save the company money.
Petterson said financial savvy doesn�t need to remain a mystery to distributors. Most banks offer seminars on understanding cash-flow management, he pointed out. \ �2002 FastenerNews.com