Are distributors cutting muscle? Companies try to find the right size in a downturn - News

Electronic News, August 19, 2002 by Rob Spiegel

At what point does it become counterproductive to keep cutting expenses? As distributors struggle to trim expenses down to the bone in an effort to show profits during a flat market, they face the possibility of leaving themselves unprepared to serve a market upswing.

Distribution executives have warily cut their expenses, trying to find that magic place where all the fat is gone, but the muscle and bone of the business is still intact. But some distributors, such as Avnet Inc., have said they are determined to deliver positive bottom-line results from flat-line revenues, which means more cutting. Some executives shrug off the challenge as par for the course in a boom-and-bust industry.

"We've had plenty of experience with cycles. The causes may be different, but we've always had to size and re-size," said Gerry Fey, VP of Memec United and operations at Memec plc of San Diego. One of the strategies Memec has employed is a reduction of fixed costs. "We're spending a lot of time changing from fixed costs to variable costs," Fey said. As an example, he pointed to the company's divestiture of its programming facility in Nevada. "Programming facilities require constant investment in new equipment," he said.

So now Memec buys programming services from the same company it used to own, which means it keeps the consistency of service while purchasing programming by the drink. Fey noted that the buyer has since upgraded the equipment, a move that Memec would not likely have made during the downturn.

For most distributors the major cuts came from layoffs, which is tricky because companies don't want to find themselves without an appropriately skilled workforce when business returns. "Headcuts have been taken, but whether it's enough or not, I don't know," said Joel Girsky, president and CEO of Jaco Electronics Inc., based in Hauppauge, N.Y. "How deep you can go is the key question. The next cut will eat away at the muscle, even the marrow of your organization."

If distributors have cut that many workers, what else is left? Girsky claims there's room to pull back on distribution outlets that are placed close to the customer. "The customers want to have everything local, but I go to customers

and say, 'You don't need a warehouse right around the corner.' The suppliers thought I was nuts. But the costs are just too great."

Some industry watchers note that distributors have already pulled back from local warehousing. "They don't have too much inventory in their branches now," said George Perris, founder and president of Sierra Marketing in Rocklin, Calif. "I see where some midsize and global guys have shut down one of their three or four central warehouses, and they keep only just-in-time inventory at local accounts."

Cuts that run too deep can affect service to customers, distributors say. "I would argue they've probably taken as many cuts as they can," said Steve Fox, senior industry analyst at New York-based Merrill Lynch. "If they cut anymore, they're cutting services or their reach to customers."

Some say heavy-handed cuts are mostly in the past and distributors are now twiddling their thumbs in anticipation of an upturn. "Over the past 18 months, we have seen significant cuts in office space and head counts," said Rob Damron, an analyst with SWS Securities Inc. in Milwaukee. "For the most part, the cutting of expenses is behind them. I don't anticipate any more cuts. They're afraid they'll cut too thin. So they'll stop cutting in anticipation that revenue will grow later this year or early next year."