Distributors see productivity gains: benefits pushed to the bottom-line, but margins still suffer - Distribution

Electronic News, June 3, 2002 by Rob Spiegel

The productivity gains coming to American industry have been extraordinary over the past two quarters, hitting 8.6 percent in Q1 and 5.5 percent in Q4 of 2001.

These stunning numbers can be attributed partly to the savings that come from outsourced manufacturing and the efficiency of new IT initiatives, but the bulk of the gain comes from fewer employees doing more work. As sales grow, executives are loath to rehire those who were cut during the depths of the downturn. Part of the reluctance to hire comes from a fear that business volume remains far below predownturn levels, but the lion's share of the resistance to restaffing comes from an interest in resorting the company's bottom-line.

The blow to earnings that came with the downturn has suppressed stock prices, as investors eye earnings and margins with a cold-blooded eye. Before companies begin to rehire, they want to make sure they have their bottom-line well bolstered. In the meantime, distributors also are looking at becoming more competitive by raising the technical level of their sales staff while also watching their top-line progress. But when it comes to deciding whether productivity gains are going to lower prices, support rehiring or pad profits, the bottom-line wins the day.

"I think the gains are going directly to the bottom-line," said Bruce Goldberg, CEO and president of Miami-based All American Semiconductor Inc. "I don't think our industry can afford to take anything off the top-line." He noted that margins presently are as low as they can possibly get and thus they need some attention. "The prices I get from my supplier can still go down, but margins can't go any lower."

Over at Phoenix-based Avnet, the goal for Andy Bryant, president of Avnet Electronics Marketing, is to push the gains into improved technology and better margins rather than restored headcount. "Typically, we take people out and add people back. This time we want to bring fewer people back and upscale our sales force," Bryant said. "But most of the productivity gains will go to the bottom. We want more gross profit dollars per employee, and we want to lower our line-item cost."

The Memec Group of San Diego is cautious about rehiring, but not so much for the productivity savings. Instead, skepticism about the strength of a potential recovery rules its thinking. "We're not going to say, 'Oh, great, the market's come back, let's bring everybody back,'" said David Ashworth, Memec's CEO. He is also skeptical about whether a distributor can count on sending gains to the bottom-line. "You make a dangerous assumption that there is something to go to the bottom-line. We're under margin pressure all the time. We'd like to see the productivity gain go to the bottom-line, but we have to be competitive."

Pioneer-Standard Electronics Inc. of Cleveland echoed the strategy of using gains for both profits or lower prices. According to Walter Tobin, senior VP of marketing and operations for the company's Industrial Electronics Division (IED), technology is the key to supporting lower prices and high profits. "By allocating dollars to technology investments and the correct human capital, we become more competitive and profitable," Tobin said. "We are capable of balancing and achieving these two goals simultaneously."

Newark Electronics, a Chicago-based unit of Premier Farnell plc of London, has pushed technology gain hard all through the downturn. The investment will continue as the productivity gain offers new leverage. "We'll take a good portion [of the productivity gain] and invest it to make us more efficient," said Jim Nichols, senior VP of sales. He also noted the company is striving to enhance the technical expertise of its sales force. "We're started to rehire some people. But we've redefined jobs in our selling organization. We've subdivided into narrow disciplines and hired people with more technical training to go with natural sales attributes."

Other distributors are asking, "Gains? What productivity gains?" Joel Girsky, president and CEO of Jaco Electronics Inc. of Hauppauge, N.Y., believes the industry is still battened down in the depths of the downturn. "I don't think gains are going to the bottom-line for margins. People are looking at surviving," Girsky said. "We're preparing for summer, and summer is historically not good. People have to be very, very careful."

On the analyst side, the stock watchers are hoping to see distributors improve both their bottom-line and operating margins. "They need to squeeze out overhead and improve return on capital," said Rob Damron, equity analyst at SWS Securities in Milwaukee. "The financial industry wants to see the productivity gain flow to the bottom-line." Damron noted that distributors are suffering from operating margins that are the lowest they've been in a long time. "The gross margins have moved higher in the past three or four quarters, but operating margins were negative in some cases. Hopefully it's all up from here," he said.

Productivity Percentages

(Past Five Quarters)

         Percentage

Q1 2001    -1.2%
Q2 2001     2.1%
Q3 2001     1.5%
Q4 2001     5.5%
Q1 2002     8.6%

SOURCE: U.S. LABOR DEPARTMENT

Note: Table made from bar graph