Businomics Blog

Wood Products Forecast: Business Strategy in the Soft Rebound

A construction rebound is coming, but it will be a soft rebound, leading to a mild recovery in wood products demand. Although somewhat better times are coming, businesses need to be prepared for the challenges that improved sales bring—it’s not all beer and skittles.

The rebound has to come because our recent level of construction has been unsustainably low. Our population is growing, albeit not as fast as when we attracted lots of foreign immigrants. The increased population triggers a demand for homes, stores, offices and other places to work.


Don’t get too excited about the rebound, because we are not returning to the go-go days of 2005 when we built two million new housing units. However, we need a lot more than the 612,000 we built last year. Further softening the rebound is the steady decline in average square footage of new housing since 2007, down about five percent for single family houses and ten percent for multi-family.

Attitudes have also changed. People now think of a house as . . . a place to live! Young couples are not speeding to home ownership as fast as they can, preferring to rent for a while.

All things considered, construction and wood products demand will improve over the next two years, but not at a break-neck pace. Even the soft rebound, though, will present challenges to the wood products industry.

Sales: are your sales people ready to book more business? You may think so, but don’t be so sure. In slow times, sales representatives get discouraged and too often become order takers. When the rebound starts, the new business goes to young people too inexperienced to know that times are bad.

Staffing: if you’ll need more people when business improves, do you know where you’ll find them? Too many managers are embarrassed to stay in touch with people they laid off, yet those may be the best potential hires in the recovery. Suppose that a manager calls a previous employee and says, “We are not re-hiring quite yet, but we’d like to know if you’re available when we do.” That former worker is going to feel great, appreciated, respected. Even if he or she has found a new job and won’t return, the phone call is a very positive event. More importantly, you can determine ahead of time how much of a challenge you’ll have if you need to staff up.

Vendor Performance: You rely on other companies for materials, which could range from logs to maintenance, repair and operations supplies. Are your vendors ready to deliver? A little work assessing their ability to supply you can help avoid major headaches down the road.

Cash Flow: Orders come in, which is good news. Suppliers may need to be paid in 30 days, and employees definitely must be paid promptly. Are your customers going to wait 60 or 90 days to pay? If so, you’ll be making money on an accrual basis but hemorrhaging cash. Do some cash flow projections now under a moderate growth scenario to see if you’ll need more financing.

This is a great time to do economic contingency planning for stronger sales. Make sure you’re ready, even if the rebound will be soft.

Strategic Planning Is a Waste of Time--At Most Companies

Strategic planning should not be a waste of time, but it often is.

Confirmation of this common notion comes from a recent McKinsey Study, "How to put your money where your strategy is." They found that most corporations do not reallocate capital among their business units, or at least not in a significant amount. The study further found that those corporations that do reallocate capital significantly outperform the others. The value of those corporations is 40 percent higher after 15 years, on average.

There are a number of important reasons why this occurs, including maintaining a collegial working environment. It's hard for the boss to play golf on Saturday with the vice president whose division had to give up capital on Friday. However, the CEO is being paid to deliver results, not to make friends of the executive team members.

How to get started with a more valuable process? I recently was gathering my thoughts before meeting with a CEO to discuss his strategic planning process, and I pulled off my bookshelf the old Strategic Planning Management by my corporate planning professor, Tom Naylor of Duke University. The short book is full of wisdom, such as that stategic planning cannot be performed by staff; decisions must be made by the CEO and division heads who will be responsible for implementing the plans.

An audit of your company's strategic planning process is the place to start, according to Naylor. I've seen plenty of planning processes fail because their objectives were not clearly identified, or the corporate decision-making culture was ignored.

The annual planning season will start in just a few months. I recommend preceding that with an audit of your process. Call me; I'd be happy to help.

 

Businomics(R) Newsletter Shows Economy Making Progress

You can now read online the latest issue of the Businomics(R) Newsletter. Data show improving employment, car sales, hotel occupancy. Home prices have turned the corner (probably), small businesses still struggle, interest rates are low and the stock market is resilient.

I ask, do you know which of your market segments will perform the best in 2012?

Data Analytics: Target Learns to be Cautious

Kashmir Hill at Forbes has a great article, "How Target Figured Out a Teen Girl Was Pregnant Before Her Father Did." Short summary: the company looks at buying patterns and can estimate the probability that a regular customer is pregnant. It sent coupons to a 17-year-old high school student. The girl's father complained to the store manager about coupons that might encourage a high school student to get pregnant. A few days later the father has a talk with the girl--and learns she is, in fact, pregnant.

I've written about the need for data analytics (Big Data: Analytics Are Essential to Corporate Profits, Growing Need for Business Analytics, and reviewed Competing on Analytics).

The Forbes article taught me something new:

What Target discovered fairly quickly is that it creeped people out that the company knew about their pregnancies in advance.

Their solution was pretty clever: send out a personalized coupon books that has prenancy-related products interspersed with other products, so that it does not appear that Target knows the customer is PG.

If you sell stuff, you are competing against companies that are pretty sophisticated in their analytics. You need to get with it, or fold up your tent and retire.

The Economics of Pricing New Technology: A Gun Story

Read about it on my Forbes.com page: Pricing Technology Breakthroughs: The Glock Lesson.

American Manufacturing and Distribution: Surviving a European Economic Meltdown?

American manufacturers are enjoying a moderate recovery, but Europe’s financial crisis poses a great risk to both factories and the wholesalers who are both up-stream and down-stream from them.

That recovery is shown by an increase of manufacturing output, up 16 percent from the bottom of the cycle in mid-2009. Total wholesale sales have grown much more, but a good portion of that reflects a more than doubling of oil and gasoline prices. However, the bad news is that industry has not grown nearly enough. The level of production remains over seven percent lower than at the previous cycle peak back in late 2007.

What risk does Europe pose for further improvement in manufacturing and industrial distribution? The risks are two-fold: loss of exports as Europe falls into recession, and collapse of spending here in North America due to contagion if the crisis spreads to our financial institutions. I believe these risks are significant, though not at all certain to occur.

European economic activity is certainly slowing, with drops in total industry production in most of the major economies there. Worry about the financial crisis is dampening spending by businesses and consumers both. It is unlikely that the Euro zone will avoid at least a mild recession. Already our exports are dipping, after years of helping to propel the economic recovery.

American manufacturers and their suppliers should worry in proportion to their export volumes to Europe. There will certainly be specific products that are in fashion and specific companies that weather the storm much better than average, but overall it will difficult to maintain last year’s sales volumes to European customers.

If Europe manages to muddle through the financial crisis—which is the most likely case—then American producers will face only a mild slowdown in sales to the Continent. However, there’s a chance of a real financial meltdown triggered by the weak credit of Portugal, Italy, Greece  Spain: the PIGS. This type of crisis typically hits private credit flows as well as government bonds, stifling spending by consumers and businesses. In this event, exports from the United States and Canada will plummet, not only from loss of unit sales but from price cutting as well. We would also feel an “echo recession,” in which our largest Asian trading partners go into a slump from lost sales to Europe. As with all echoes, though, it is milder than the original tone.

A real melt-down of the European financial system could have another significant consequence for American manufacturers and wholesalers: a collapse of lending, and thus spending, on this side of the Atlantic Ocean. Financial crises often spread from one location to another in a phenomenon called contagion. A loss in one market makes financiers get nervous about all other markets. They hunker down, denying loans to everyone. At that point, spending has to slow dramatically, even in sectors that were not originally the problem.  Could contagion spread a financial crisis into American markets?

Let’s first understand the problem we had back in 2007 and 2008. Our financial system had become multi-layered, and required each layer to function smoothly to get credit from the saver to the end user. Bank loans exceeded bank deposits. Banks and other lenders were securitizing all kinds of credit, business and consumer loans as well as mortgages. Third party guarantors assured everyone that risk was low.

When the financial crisis occurred, credit froze up at various steps in this process, and the third-party guarantees were doubted. New credit issuance came to a standstill.

Would history repeat itself in the United States if Europe’s financial system flamed out? I think not. Our banks are now lending out only 80 percent of their deposits, down from over 100 percent in the boom. Securitization of non-mortgage loans is small. A much greater portion of our total credit is plain vanilla: a depositor puts money in the bank, and the bank lends the money to a business. It’s simple and much less prone to sudden halts from panic. There are no guarantees, of course. The financial system is too murky for anyone to be sure what will happen, but I’m fairly confident that our risk is from our exports, not from our financial system.

Thus, manufacturers and distributors of industrial parts should do contingency planning for a European recession. My best guess is that Europe will muddle through, but the risk of a real recession on the Continent is too big to ignore.

For more help on how do the economic contingency planning needed with this economic environment, watch my videos, Economic Contingency Planning with risk of recession:

Business Planning With a Risk of Recession: The Stance

Business Planning With a Risk of Recession: Strategic Initiatives

Business Planning With a Risk of Recession: Economic Contingency Planning

Business Planning With a Risk of Recession: Check Points

Business Planning With a Risk of Recession: Upside Potential 

Exports: Risk of Recession Rising

Maybe I’m a little jumpy, having just created a series of videos about business planning with a risk of recession.

Today’s foreign trade data worry me. If the United States economy is going to turn down, then foreign trade is the most likely source of the slump. Consumers are fairly stable now, spending in pace with their income gains. Housing and non-residential construction are weak, but don’t have much room to worsen. Government spending is not going to suddenly crash. The two major risk areas are exports and business capital spending.

The latest decline in exports may just be a blip. It’s not unusual to have a sawtooth pattern, with the little dips being meaningless in the long run. That could be the case here. However, we know that Europe is slowing down and quite possibly in recession now. China’s economy is growing less rapidly due to its inflation-fighting efforts. (For more details, see myChina economic forecast article.)

It’s too soon to hunker down, but not too soon for some planning. You can start by watching my videos:

Business Planning With Risk of Recession: The Stance

Business Planning With Risk of Recession: Strategic Initiatives

Business Planning With a Risk of Recession: Strategic Initiatives

I posted a video about how to do economic contingency planning for the risk of recession with respect to your business's strategic initiatives on my Forbes.com page. Here's the introduction:

The economic forecast has a major weirdness. Most of my colleagues and I think that this year will bring light-to-moderate growth, but we’re also warning of the possibility of a recession triggered by the European financial crisis. How do you, as a business leader, prepare your company for growth if it occurs, but also protect it from recession?

...

So you had a planning session, maybe an offsite. If it was at a nice resort in a sunny climate, then you should have invited me. I love helping companies with their planning. Anyway, there are two types of results from a planning session:
1)    Goals for key financials, such as sales, expenses and profits, or
2)    Key strategic initiatives, the big over-arching efforts your enterprise will undertake this year. I’m going to talk about those strategic initiatives in this video, then discuss how you deal with routine business processes in the next video.

 

Business Planning With a Risk of Recession

I've posted a new video on my Forbes.com page on the subject Business Planning With A Risk of Recession. Here's the introduction:

We economists are predicting light to moderate growth this year, but we’re also saying there is a significant chance of recession. That sounds weird, but the important question is, “What are you going to do with that information?”

In this series of videos, you will learn how to deal with the weirdness that comes from planning your business operations when the consensus economic forecast calls for moderate growth, but there is also a strong risk of recession.

More videos on this topic will follow.

Vendor Performance a Continuing Problem as Economy Grows

Although the economy is not growing rapidly, some companies are anticipating strong growth and recognizing the challenges that growth can present. Yes, growth is not always easy. There can be challenges to financial resources, labor and the one we'll discuss today, vendor performance.

Vendor performance in the economic recovery was one of my "11 Business Challenges for 2011." It will continue to be a challenge for some companies in 2012.

The Wall Street Journal carries a story today, "Boeing Examines Supply Chain for Weak Links" (probably gated, but you really ought to have a subscription). The aircraft company wants to ramp up production of its 737 by 60 percent over the coming three years. That's a big production increase, and Boeing wants to ensure that its vendors can deliver. Instead of simply placing orders and communicating production plans, Boeing is sending teams to evaluate each critical vendor's ability to deliver. This is great practice, similar to what Caterpillar did in the early days of the economic recovery. (See my article about Caterpillar and the "bullwhip effect.")

The Boeing story brings up an important point: the overall economy does not have to grow rapidly for a company to have vendor performance challenges. Boeing is enjoying strong orders for the 737. Some other companies are seeing their particular products in growing demand, even as the overall economy is growing only modestly. Your overall sales may even be falling, but if you have one key product that is enjoying strong demand, make sure you can get the parts you need to continue production.

The latest industrial production report from the Federal Reserve shows that overall industry increased output by 3.7 percent in the 12 months through November 2011. But look at the sectors with really strong growth:

Oil and gas drilling, up 21.2 %

Motor vehicles, up 15.6 %

Transit equipment, up 25.3 %

Even outside of these hot sectors, there are specific products with above-average demand.

What should you do? Here's a quick summary of my article, "Economic Recovery Hampered by Vendor Performance Problems: Four Steps for Companies with Supply Chain Challenges:"

1. Understand each vendor's ability to deliver parts reliably.

2. Look for alternative vendors when you identify a vendor who may not be able to deliver.

3. Evaluate the vendors who are not current problems to determine if they might become a problem.

4. Honestly talk to customers about the challenge.

Although I'm not a supply chain expert per se, I've been around this problem long enough that I can identify the steps you need to take to ensure your access to critical parts. Give me a call if you need support.