Tips for Riding the Rollercoaster
What do to when business goes up and business goes down
If warehousing and distribution are part of your service offerings, chances are you’ve had to deal with the ups and down of the market. Logistics veteran Steve Howard talks about adapting to the changes in the flow of business. Whether it’s ramping up operations when things get suddenly busy or scaling back when things slow down, Steve’s dealt with it in his 26 year career in logistics.
Steve is a member of the CLDA Board of Directors andthe President of Esquire Express and Esquire Logistics in Miami Florida. His combined businesses are one of South Florida’s largest delivery services, providing courier delivery service, logistics and process serving.
Question: When you’re handling distribution and logistics, what’s one of the most difficult decisions you have to make?
Howard: Managing the square footage you have at your disposal and balancing the costs of maintaining it with the potential for profit. It’s a well- choreographed dance to ramp up and scale down operations when client demands are constantly changing. When opportunities come in, adding employees to handle it is one issue. Thankfully it seems there are always qualified people looking for work. We don’t have a problem getting quality trucks, delivery teams and office people. The real challenge is when you have to ramp up additional space. One of the critical issues is that landlords want you to sign a long-term contract for more square footage. As an example they are demanding two or three-year leases even if it’s just short-term space you need for a project or a temporary spike in business.
Question: How does that spike in business happen?
Howard: Sometimes it’s about ramping up to meet organic growth with the current customers you have. All of our customers are looking to grow, so they’ll pick up a new line and thankfully they want us to handle it.
Some of our customers have spikes in sales during the year. We handle a lot of home improvement merchandise, for example. Usually around March or April there’s a spike in these types of purchases and we get in a lot of orders that can push the limitations of our four walls. And, of course, there’s always the need to respond to the holidays. Our customers expect we’ll be able to manage whatever they throw our way and managing space during peak times is absolutely critical to our growth and ultimate success.
Question: What do you need from your customers to deal with this?
Howard: Communication beforehand is huge. If our customers can foresee a spike in their business, they absolutely need to communicate that to us. We need to understand the expectations they have of us when that time comes. If we’re operating at 85 percent capacity and one or two of our customers experience a 25 percent spike that they don’t communicate to us, that will create a problem. We’ll do what we can to adapt, but if we’ve got a warehouse that’s full it can lead to gridlock where nothing can move in or move out.
Question: Have things changed when it comes to dealing with landlords to secure short-term space in response to these kinds of spikes?
Howard: Definitely. When it was a tenants’ market a few years ago, landlords were more than willing to cut us a short-term deal. Not anymore. In South Florida the market is extremely tight and owners are taking financial advantage at every opportunity.
Let me give you an example: This past Christmas a number of my customers said they were expecting a huge boom in sales. I went to my landlord (who I’ve done business with for over six years) and asked for a three-month lease on an additional 20,000 square feet. We got the space, but he charged me a premium for it. It was frustrating. He had the available space but he wouldn’t cut me a deal unless I was willing to sign a three-year lease, even though I already lease 75,000 sq. ft. I wasn’t willing to commit to this long- term contract so he charged me a premium, which really affected our bottom line.
Question: Talk about the prospect of scaling down. How do you deal with that possibility?
Howard: Obviously, we all worry about paying for space that’s not generating revenue. I try my best to anticipate what my clients will need. When my lease is coming up for renewal I call all my customers a few months in advance and I ask them to look into their crystal ball and project where they think their business will be in 12, 24 and 36 months. I get a feel from what they are forecasting, but it’s not foolproof. Unfortunately if I commit to a certain amount of space and then we lose a big client, we could have a substantial amount of square feet sitting empty. It’s a constant juggling act to make sure we have good clients who are willing to pay a fair rate that keeps us at 85 percent occupancy; which is my target.
Question: You’re not shooting for 100 percent occupancy?
Howard: No. You need some wiggle room. If your goal is for 100 percent occupancy, bad things will happen. When you’re at full capacity no more freight can come in and nothing can get out. It’s referred to as the Blow-Up Effect. Every time you need to get to something you have to move things around. If you are forced to move product over and over you run the risk that your customer’s freight will get lost or damaged. That’s also how you end up having to take last-minute space at a premium. Landlords know they have you over a barrel and they will charge a maximum rate to “help” you out of that situation. Those increased costs will eat away at your profit.
Question: So what’s your advice for handling this balance?
Howard: Here are my tips: 1) Make sure you have a good working partnership relationship with your clients that includes good communication; 2) If you’re going to scale up, make it fit with your long-term vision of where you want business to grow. Decide before taking on new business if it’s the kind of business you really want; 3) Scale down for the right reasons; not just because of a momentary dip in business. You’ve built the machine with the right parts. You don’t want to dismantle it unless you’ve done everything you can to fill that piece you lost; 4) Seek customers that understand the value of the work you do and are willing to pay a fair price for it. Get out of working with clients that don’t care about your profitability. Skip working for the ones who don’t want to be in a partnership relationship. And 5) once you decide on those target customers let your sales people know so they can seek out the right customers that fit with your business model.