Manufacturing & Distribution Podcast

2023 Industry Predictions

Alexander Group Principals Kyle Uebelhor, Arshad Carim and Andrew Horvath share insights and five bold 2023 predictions for the manufacturing and distribution industry.

Kyle Uebelhor: What’s happened in our world with pricing, especially in the manufacturing distribution space, has really been a challenge for many folks. And, you know, as we look at going forward, you’ve got to have a good pricing strategy and then be able to execute against that strategy as we move into next year.

Opening: It’s time for another episode of the Alexander Group Revenue Growth Model Podcast. Welcome and enjoy.

Kyle Uebelhor: Hi again. It’s Kyle Uebelhor with the Alexander Group’s manufacturing and distribution practices. And I’m joined by my two colleagues today, Arshad Carim and Andrew Horvath, and we’re here today to talk to you about some exciting ideas that we think are headed our way as we step into 2023. In fact, alongside Andrew and Arshad, we’ve got some pretty bold predictions that we think are going to be affecting all of us in the commercial environment coming up next year. Five big ideas, five big things to start. And I think what we’ll do is go right into it.

Number one, we believe strongly that the supply chain conundrum that we’ve all been dealing with is about ready to come to the end. But the question is, is that end of that coming in sight to us, the beginning of a new problem for our commercial teams because we have been lost that muscle memory or that capability of selling because we’ve all been solving problems for supply chain. I don’t know. Andrew, what do you think? What are we seeing here?

Andrew Horvath: Obviously, if we were able to give you an answer about when the supply chain gets back to its full level of health, we’d be going to Vegas and making a bunch of money there. But I think the idea here is that there are certain parts that cycle that are being smoothed out. Hopefully logistics are happening a lot quicker and smoother and getting back to normal levels. But to your point, I think the last year or so you’ve had a lot of sales organizations that have zero product to sell and they for the most part, we’re going out on long apology tours to their customers and explaining why they didn’t have product on the shelves or available to ship and hoping to figure out when they can get to that next order or shipment fulfillment. So I think the idea here is that we hope to have not lost the art of selling now that we hopefully will have product back in stock and can actually get orders out the door. What does that mean for our sales team? Did their skills erode? What are the trainings and the development opportunities that we need to get them back to where they were and ideally beyond where they were in the past? And these are things like negotiation, scoping, pricing, closing deals and for some longer sales cycle opportunities, trying to get up early in that sales process and become the basis of design or nailed down that spec.

Kyle Uebelhor: Yeah. And not to mention the problems that may have inadvertently been caused by us having to adjust compensation structures by us not being able to produce this last year. So there’s a whole host of things. But I think the fundamentals on this is even though we may see some recessionary winds in our face coming up, the idea of the supply chain issue that we really got shocked with this last year should hopefully clear up and fundamentals matter. And if we can get that set correctly, those selling behaviors will come back to the forefront.

Arshad Carim: Yeah, Kyle, the word I’ve been hearing a lot from executives is about hunting. Like, how do we make sure those new accounts that we probably weren’t touching for a long time? We’re back after that because that’s going to be a growth vector for us.

Kyle Uebelhor: Great point. Yeah, that’s exactly right.

Andrew Horvath: And I think to avoid that whipsaw of sales comp plans, we’ve had a lot of folks that have gone from orders to shipments that looking back to orders for 2023, probably best to have a couple of year outlook in terms of where we want to get to in a steady state. So we avoid doing the dance steps every year to go back and forth from one to the other.

Kyle Uebelhor: You know, guys, that kind of leads us quite well to the dance steps of where we want to go in a longer term. Horizon leads us to the second bold prediction. Bold prediction number two for us is that, you know, if you’ve been riding the wave of pricing increases through natural inflation, be prepared to wipe out soon. We’re not here to be macroeconomists. But, Arshad, I got to tell you, what’s happened in our world with pricing, especially in the manufacturing distribution space, has really been a challenge for many folks. And, you know, as we look at going forward, you’ve got to have a good pricing strategy and then be able to execute against that strategy as we move into next year.

Andrew Horvath: Yeah, Kyle, I think one of the things that we’ve heard so far is that the ability to be aggressive taking price in 23 is going to hinge on your ability, your demonstrated ability to do it in the past. So if you haven’t been aggressive in taking price increases and pushing your sales force to do that, it might be a tough time to start this year, especially because if you think about 2022, many of the price increases that we passed on to either distributors or dealers or customers think contractors, maybe they really passed on to the ultimate end user just thinking the building materials market, you know, anything from windows to to wood to build a deck, anything ornamental as well. Homeowners are paying a lot more for that. And it was sort of accepted that the price of everything was going up. And that came in an environment that people had some cash on. And I think when you get to a recessionary environment, potentially, it’s going to be harder to pass those price increases all the way through to that end user homeowner or facility owner or what have you. So I think one of those areas where hopefully your sales force is taking price, but if not, there’s going to be a pretty concerted effort to go rally around those segments that we think we can move the needle.

Kyle Uebelhor: Yeah. Pricing is going to have to be a strategy for us. We have to be thoughtful about not just the cost plus mentality anymore, but actually how do we use pricing as a differentiator. And as I mentioned back to you, Arshad, and that is that execution against the pricing strategy matters. In other words, it’s our sales team equipped to actually hold the line on the list prices that we said, are we giving them the right toolkit to be good on discounting?

Arshad Carim: Yeah, and that’s reinvigorating the conversation with some some of our clients around, You know, how do we do that? We can use a comp plan to manage price and manage discounting, but we can also build the right infrastructure through deal desks and other ways of controlling it. So I think that conversation is heavy on the table. The other thing is, you know, if price increases have been difficult for you, look to your coverage model and look to other chess pieces that can help you drive a more efficient go-to-market model. And the things that people are looking at here are how do we get a more robust e-commerce presence? How do we drive a better digital selling motion or inside selling motion because we’ve got to find those dollars somewhere else.

Kyle Uebelhor: Andrew, on this topic, you know, as we think about our relationship with our distributors, having a good partner program matters too.

Andrew Horvath: Yeah, that’s right. It’s about price is only one part of the equation for growth. You think about units year over year, product mix, those are things that the manufacturers want to see their distributors execute the plan on. And I think that’s one of those things that may have been sort of smoke and mirrors for growth in 2020 to a lot of folks that we work with. If you look at their annual report, pretty significant year-over-year growth, but 90 plus percent is related to price increases, whereas the rest of that organic growth coming from. So relying too heavily on price increases to get you there in 2023 is probably a fallacy as well. There’s got to be good strong unit growth and profitability improvements via the right mix of product as well.

Kyle Uebelhor: You know, and that again, right into bold prediction number three. And that is after coming out of this economy in the last couple of years that we have been whipped sell to use your term, Andrew, and we’ve seen a lot. One thing we do know, we do know buyers have changed and reevaluating their own economics and being able to sell something as a service, being able to sell or create value and not just deliver a product is the key to the equation of customer lifetime value. Bold prediction Number three says you need to get on on the journey if you’re not already there to find your X in X as a service, What are you doing to actually provide something as a service that moves you closer to some sort of operating model that doesn’t rely exclusively on CapEx? And this is one that’s interesting because I had an interview with a chief executive, a CEO of a company based in Europe a couple weeks ago, and he wasn’t interested, although we had all kinds of Iot embedded in his systems and is advanced mechanicals for his industrial company wasn’t as interested in trying to monetize that actual data or the software he was most interested in knowing that that telemetry that he’s getting back from his embedded Iot helps him get predictable revenue. That’s what the street’s interested. And how do you get more predictable with your revenue? And more importantly, what can you do with that to become more profitable? Because I think that’s the key, is that as we step into next year, profitable growth is going to be the key as we go forward and profitability does come with selling something or monetizing the value you create, be it via service or traditional services or anything else. Andrew, thoughts?

Andrew Horvath: Yeah, I think being getting paid and having a revenue stream that’s harnessing your data, being able to offer insights or predictive items like maintenance or things like that to clients is that’s the promised land, right? But I think even in the meantime, manufacturers and distributors are providing a lot of services that are wrapped around products that are valued by customers, maybe a differentiator but are not being valued appropriately or being paid for by the customer. Even things like setting up an onsite warehouse for a construction site. That might be something a distributor does at their own cost. And it’s pretty significant for the builder to be able to have all the products at the exact right time. And that’s a cost to the distributor, right? That’s a stocking costs. That’s having people at that facility, even though it’s temporary to run that. So can we get paid for that? Right. I mean, it’s even to offset that cost. But more importantly, can that be a revenue stream? Because I think as folks have developed those services, they realize that there’s demand for it and it is a differentiator. And I think the ones that are really seeking out that profitability at every turn are finding out ways to price that appropriately price into the overall deal.

Kyle Uebelhor: Yeah, the biggest mistake I’ve seen is and again, it’s a challenge to get them to pay for that service, that example you gave with a onsite warehouse. The biggest mistake I’ve seen is not even expressing that value to the end user, to the customer and our side. We see this a lot when we’re working with clients. You’ll have somebody who’s doing something that is extremely valuable to that, to that client, that end use customer. And no one actually just acknowledges that they’re getting that value.

Arshad Carim: Couldn’t agree more. And I think the other go-to-market implication of this is the rise of a customer success role to drive that predictable or recurring revenue that you talked about. Kyle and we’re hearing more and more of how do we think about that role because it’s become critical as the growth of that recurring revenue is a bigger piece of company’s overall picture.

Andrew Horvath: And I’ll put in a plug for something that I didn’t talk about in a bit with the revenue operations. A lot of times the execution or the delivery of those services may be at a branch level or a region level where we’re very concerned about the expense. The operational side of the business. And that might not be connected enough to the sales side. Whereas to say, hey, know, branch manager or operations manager, if you deliver these services, we’re going to see a pretty big uptick in revenue or gross profit overall if they’re too myopically focused on just the operations side, that might get lost and we might not be able to or choose not to deliver that service. So there has to be that link between the sales team and the delivery team or the ops team to make sure that all works together.

Kyle Uebelhor: Speaking of which, I think is a natural lead into bold prediction number four, and that is the idea of a continuing idea, Arshad, of something that’s near and dear to your heart. And that is this notion of revenue operations and how it’s continuing to accelerate and mature faster than we even anticipated ourselves.

Arshad Carim: Yeah. So in the prediction vein here, we’re going to say data. Everyone’s got it. Data doesn’t differentiate you at all anymore. It’s all about insights and what you do with the data. And there’s a couple interesting vectors around that. One is, in our recent research, we found that only 29% of companies are actually integrating the traditional sales operations functions with some element of either marketing operations or service operations. And there’s a lot of magic in bringing that data together to create the insights that we’re talking about in this bold prediction here. And it’s the revenue ops or the commercial ops team that does that. Right. And structuring that in the right way, allowing the data to flow and actually hiring the skill set to create the insights that then get fed to your commercial engine is really going to be critical, we think, in the next few years because it’s not everybody’s got the data. And by the way, the table stakes is the data. And if you’ve still got work to do there, you’re probably behind. This is what’s going to lead you down, kind of the promised path of getting better upsell, getting better cross-sell, being able to do predictable things with your customers before they even ask you or reach out to you. Back to your telemetry comment from earlier, Kyle, being able to know when a customer needs something and when I might need to deploy sales or service to help them out.

Kyle Uebelhor: Yeah, and the research we’re doing right now on rev ops and what we’re seeing the most mature organizations do, the investments in rev ops continue to pay off, not just in terms of overall growth, which are the things you just alluded to, but as we step into some potential economic headwinds that in front of us is where we find profitability. This is the group that can ensure that we’re placing our bets and making our investments in the right spot. It’s a crucial component of where you’re going to go. And you’ll notice that we have stopped saying the word sales operations. That was the in vogue term 3 to 4 years ago. And we started dipping our toes into rev ops. But rev ops means you’ve got to connect the insights from the marketing sales down to the service team in totality and the functional group that does that is really one of your secret, secret weapons in this journey.

Guys, we’ve got one more big bold prediction. And I can’t believe we’re already at number five. And number five is the idea of your commercial talent is going to continue to make you a differentiator. We keep hearing everyone can open up the Journal any given day or turn on the Bloomberg and see the layoffs that are impending. And different sectors and different industries. But in manufacturing, especially in your commercial organization, meaning your marketing, your sales team in particular. Yeah, we are seeing that that race for talent is not going away this year. And we had such an acute issue with turnover recently and more importantly, finding those next new hires who are really a different type of individual than we’ve seen in the past. That challenge is going to remain with us deep into 2023 and perhaps beyond. And the answer to that conundrum is to make sure you’ve got a really good talent development program and you’re and you’re setting yourself up for the appropriate engagement model with your employees. Guys, what do you think comments on that? This idea of talent is huge.

Arshad Carim: The first place people love to go is compensation. But pay levels, right? We’ve got to look at pay. We’ve got to increase our pay. But I think what we’re finding is turnovers up and turnovers been up for a while and comp has actually gone up as well. But the conversation, Kyle, really is about a lot of these other elements that aren’t necessarily directly compensation. They affect the whole person, right? It’s flexible work, big one. It’s what are you doing from a training and development perspective? How are you delivering a more clear career path for me to navigate the organization? And that leads to retention, right? Which will bring down that turnover issue. Sure pays a part of it. But career path competency models, better coaching, better training, those are all elements that I think are at the top of the list when we talk to executives in terms of this talent piece and how do we drive better attraction and retention.

Andrew Horvath: Yeah, I think it’s one of those where the winners that are going to come out of what’s sort of predicted to be a chaotic start to the year are going to be folks that are aggressive with very specific hires. So it’s almost like a game of cards when you’re looking around the table for someone’s really good discards and you’re able to figure out which ones are going to help you right away, be a super talented sales rep, a sales manager inside sales resource or revenue ops resource. There are some organizations that are going to have to cut quicker than others. I think if folks have the wherewithal to be on the hunt for that talent, you can bring some heavy hitters in the organization. Part of the situation is that like we talked about earlier, when you’re less able to raise price like you were last year and when certain end markets are going to suffer more than others, there are some sales forces that are more at risk than others of contraction. I think having your eyes on those, you know, having an alert as to when a high performer is let go, the quickest act are the ones that are going to win.

Kyle Uebelhor: And think outside the box of your traditional industry, because I think that’s where we’re going to see some real opportunities for talent and upskilling and development on organizations in the tech sector, in the med-device sector elsewhere where we haven’t traditionally hired from, but are actually going to bring great skills that are needed in our sort of future state go to market. All right, guys, that’s been five big bold predictions. I’m going to put you on the spot for one more final comment from each of you. And that is the final comment is what is 2023 going to give us, Andrew?

Andrew Horvath: Yeah, I think it’s going to be a lot like 2020, not that we’re going to have a unleash a global pandemic, hopefully, but I think that in 2020 you saw a pretty different outcome depending on your end market might be the different set of end markets that are successful this year and different set that are at risk. But I think it’s one of those where the effects of whatever people are predicting for 2023, it’s probably not going to be industry wide. It’s going to be more pronounced in some end markets than others.

Arshad Carim: I think I’m going to hinge on this, this topic of talent and people, and I think the leaders that we talked to are talking more and more about how do we make sure we have the best talent in our organization. And I feel like those companies that have lagged in the performance management aspect and have sort of kept Deadwood around. Right. And haven’t really optimized that talent set are going to really suffer from that. And I think the leaders are also really trying to figure out how do I bring the best and brightest in and develop the programs to do that. So I think we’re going to see more of that. And I think it connects to Andrew’s comments about the deck of cards and finding those diamonds that you can pick up that really make a difference in the organization.

Kyle Uebelhor: Mine is going to be this. And that is to say that the more things change and more things stay the same. But I don’t think the pace of change is going to be slower than it is right now. I can fully anticipate, regardless if it’s a separate sector or what’s going to be the next curve ball from a macroeconomic perspective coming our way, that if you’re not poised with the fundamentals of a good commercial excellence team, an organization that has talent processes and technology set, and you’re as a leader not thinking about the strategic vision to sort of demonstrate that purpose, then you’re in trouble because you’re going to be surprised at how fast things will continually change. That all said, it’s going to. Be fun. It’ll be an interesting ride. We’ve been through a lot together the last couple of years. I think we can continue to go forward. So thanks all for joining us today and look forward to the next connection. Reach out any time.

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