Six months into the Donald Trump presidency and the world is changing faster than a pit crew changing tires at the Daytona 500. The stock market is setting records every other day. Interest rates are creeping up. Manufacturing lead times are measured in quarters and not weeks or months. And the equipment rental companies are bringing old machines out of their “bone yards" which have been sitting for years, and pressing them back into service. What could be better than a market that asks “When can I have it?” rather than “How much?" and the calls to come pick something up are replaced by “We need it another month or two." Feels like 2007! Happy days are here again! Right?
Well, let’s slow down a minute before we run out and build another house or buy a larger boat. I remember those days when manufacturing lead times were four to six months, and rental companies raised rates two to three times a year, and contractors had to decide which jobs they wanted to bid on. And everyone got a bonus. But my remembrance of those times is somewhat clouded by visions of my superiors asking me why I only forecasted 25-percent increases instead of 50 percent; dealers calling me to say my lead times were too long, so they were calling the competition; and the supply chain saying they could not increase their forecast for at least four to six months and then it was going to be 10 to 20 percent more expensive. And if you did not want to pay that price there was a line of people who would! Start to get the picture?
When the market sees gains like these when there is still only conversation about the changes the new administration wants to make, and when the whole political system is as divided as much as it ever has been, you have to wonder what everyone is betting on. Good markets are like good parties: Everyone wants to join in and have as much fun as possible. Get there early, stay late, and grab all the good times you can. But the next day can be rough! If you managed through 2008, 2009 and 2010, you know what I mean. Market demand collapsed. Rental rates dissolved. Lead times became piles and piles of inventory that you could not give away. That's why it's important during these good times that we take the time to remember how tough those three or four years were after the recession of 2008, and try not to repeat the actions that caused the recovery to be so slow and painful. This strong market condition could last a long time with a few breaks - like an infrastructure bill, military spending, energy production, and the United States still being the one place everyone feels their money is safe. The answer to how good a market like this is for us in the long run depends on not making the same mistakes we did the last time we all went to the party. What should we have we learned?
1. You need a plan. Too many companies do not have a strategic plan because they do not take the time to build one. “We are too busy to sit in a room all day” is a common excuse. But if you do not know where you want to go, any road will take you there. Just because the market goes up 20 percent is not a reason to force your company to grow right along with it. Grow what you can reasonably afford to risk. The market will not stay up forever and you need to have a strategy to come back down without killing your business model or having to make drastic changes.
2. Get what you can of the growing market share but do not out-run your manufacturing or service capability. Build too fast for too long, working weekends with overtime and temporary help, will cause your quality to suffer. Run at 85-percent utilization in the rental fleet for very long and you will never keep up with routine maintenance and you'll have more breakdowns and burn your service technicians out. Don’t get greedy.
3. Do not start jumping from vendor to vendor to get additional product faster just to increase production or fleet size. This just causes the company problems down the road and increases infrastructure costs to deal with the unique products or parts for the life of the machine.
4. Analyze the sales forecast in depth to make sure it does not double or triple count growth. I remember one time the Florida sales team forecasted a close to 50-percent increase year over year. Later I realized that each sales person was expecting their customer to grow 10+ percent in purchases to cover a new Disney expansion project. But of the five customers only one would get the work. So understand where the increased forecast is coming from to verify if it's realistic.
5. Watch your expenditures. It's easy to let spending reports get missed when they're covered up with PO numbers. Watch the spending in real dollars and not in percentages, as revenue will not stay at this level forever and it leads to expectations from customers and employees.
6. Finetune your core competency. Do not start trying to do things you do not normally do just because someone asks you to. You can lose a lot of money trying to be all things to all people, especially when you are not an expert in the field.
7. Raise the price a little at a time but more often. Market demand drives price but by raising it a little at a time it's easier for your customer to accept and easier to track internally for when you have gone as far as you can for now.
8. Build your reserves and pay down debt. Adding plant or branch expansions for the sake of building or renting more machines during a fast-paced market expansion is not wise. As the saying goes, “Don’t build your church for the Easter and Christmas services."
9. Do not let market share be your North Star. Follow the profitability of certain products, job types, customers and locations. Everything is not equal. Bottom line growth as a percentage of revenue growth is always the best outcome at the end of a rapid market expansion.
So as we enter this new era of "Trump economics" it's important to realize that the market no longer takes days or weeks to adjust. We have a divided Congress, international terrorism, rouge dictators, and international currency manipulation. But the market demand for construction-related equipment would lead you to believe there is nothing but good news. Until one or more of these issues implode. Then the most important question will be “How can I survive”? The answer is by having a flexible plan, being nimble in its execution, not overspending, following your core competencies, and lastly, not getting locked into a definitive position on the market that you try to defend at all costs. It should be a very interesting three and one-half years (at least).
