Stay calm, plan to survive, and carry on!

Over the last five years the electronic components market in the UK has enjoyed a positive underlying sales revenue trend, but this year expectations are of a 4% decline in sales revenues. Adam Fletcher discusses how organisations should plan, prepare and implement change in order to best manage this decline.

It an almost universal business truism that “Sales Solve Everything”! First win the order then sort the issues out later. Whilst there is always a risk that the order will be cancelled or rescheduled and/or the invoice will be paid late or perhaps not at all, winning the order provides significantly more positives than does losing it to the competition.

If, in a declining market, the level of sales revenue change is forecast to be in single digits the likely outcome for an organisation that chooses not to intervene is simply a reduced net profit margin. This might impact investor sentiment but is probably not going to be catastrophic in the short-term.

The majority of organisations in the UK/Eire electronic components supply network are conservative and continue to make sensible provisions for potential changes in sales revenue based on their internal sales forecasts, market intelligence and management sentiment. Some companies however hope that they can outsmart their competitors, gain market share, find new customers and as a result, not be affected by changes in the market.

We’ve seen historically low levels of recruitment within the industry over the last five years: new employee hires have been generally limited to the maintenance of the established workforce or as planned investment in new opportunities with a high probability of success. On the plus side we’ve seen small jobless economic recoveries and minimal downsizing but existing employees at all levels are required to work harder, more effectively and more efficiently.

Training, events and advertising budgets are generally amongst the first to be down-sized when the going gets tough, along with restrictions on non-essential travel.

However for many organisations the largest potential assets (or liabilities) are their manufacturing facilities and inventory and it is on these areas that most management attention gets focused. Accurately matching manufacturing output to anticipated demand is critical but in practice is almost impossible to achieve, especially over multiple manufacturing facilities. Striking the optimal balance directly affects in-process and finished goods inventories but also impacts lead-times. The inevitable result unfortunately is to undershoot actual demand and lose sales revenue or overshoot and add manufacturing and inventory costs.

It is important to engage with the organisation’s entire supply network and communicate the organisation’s needs effectively to all partners. Accurate information is better than no or misleading information, even when it’s bad news, as it enables everyone in the organisation to plan more effectively, which actually helps the entire network.

It’s also critical to investigate synergistic cost savings (something of value to both parties), which can often be surprisingly simple, i.e. consolidating shipment costs, combining multiple organisations demand for freight services, providing additional credit facilities, buffering additional inventory, placing longer term order cover, revising a specification, meeting standard pack multiples etc.

Banking and finance providers are also significant partners and need to review the range of services they may be able to provide and where they could add more value, for example via lease finance or credit factoring.

Many electronic component manufacturers rely on the revenue from the development of new products or services or, following acquisition of another product line or organisation, by selling into a common customer base to grow their way out of a declining market. But in our now mature market this is becoming increasingly difficult.

Manufacturer authorised distributors often request additional margin from the manufacturer to support their design-led operations or hope to increase sales revenues into new or existing customers by adding a new non-competing manufacturer to their line-card. Additional incentives to sales and marketing staff for improving performance is often used, as is special offers to customers against specific products, but generally these techniques only have a limited, short-term effect.

The latest generation of Enterprise Resource Planning (ERP) systems used in the electronic components industry provide a great deal of management reporting information for a business, particularly on products but also on individual customer profitability. This information enables the organisation to analyse business opportunities based on real data and suggests where the profitable sales revenue is generated. In a declining market it is necessary to seek a profit- maximising as opposed to a market-penetration strategy. Determining which products and customers optimise profit return in order to de-emphasise those that don’t is becoming much more prevalent. Good fortune still favours those who plan carefully and position themselves well to benefit from unexpected business opportunities.

Pundits forecast that many organisations in the UK/Eire electronic components market will have to face up to a 4% decline in their sales revenues in 2012, due to the current difficult global macro-economic environment.

Consolidated ECSN results for the first two months of 2012 seem to confirm a decline – Bookings and Billings are both down on the same period last year –but the trend appears to be shallower than ecsn members originally forecast.

Adam Fletcher is Chairman of Afdec/ECSN

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