As the economy improves, company owners face a new challenge: How to handle a spike in sales.
On the heels of a brutal recession, a sudden rebound in sales can feel like 20 inches of rain after a drought. New business is cause for celebration—but caution, too. A big increase in sales brings with it a set of management conundrums. Should customers who stood by you during slow times continue to get special treatment? Can your production floor ramp up fast enough? Will everyone need to work overtime?
The very tactics that helped many companies ride out the recession—hoarding cash and shedding inventory, reducing the workforce, and eliminating overtime—can impede a sales rally. At the same time, sales spikes can be sporadic or short-lived, making it hard to justify new investments in staff and equipment. But with some planning, you can not only survive the spike but thrive. Here are nine steps to take in order to wisely manage a spike in sales.
1. Staff up prudently.
"When a sales surge occurs, it's always a balancing act," says Warren H. Hausman, professor of operations management at Stanford University. Companies must decide whether to add new staff or build up their inventories in anticipation of a longer rally, or whether to play it safe.
Direct labor is a typical bottleneck in today's service-oriented economy. According to CareerBuilder's 2010 Job Forecast, 20 percent of employers plan to add headcount in 2010, up from 14 percent in 2009, but the research firm found that hiring managers are still jittery.
Holding back on hiring makes some sense since a sales spike can be temporary. But hold back too long and you might find that you've blown an opportunity. John McQuillan recently experienced that quandary. McQuillan is CEO of Triumvirate Environmental, a $60-million waste disposal and clean-up company in Somerville, Massachusetts. The company experienced a sales spike in April, "our largest month in 22 years," says McQuillan. When the spike continued in May, the Triumvirate chief knew it was more than a spring fling. "It's the best backlog I can ever remember," gushes McQuillan. "Having said that, I'm a little gun shy."
Prior to the spring sales increase, Triumvirate endured 16 grueling months of "one client after another asking for concessions," McQuillan says. In that slow period, his sales and operations managers spent most of their time trying to hold onto customers by helping them reduce costs. Then, all of a sudden, those same clients came back and were eager to return to pre-recession service levels. At the same time, Triumverate's sales force landed brand new customers. McQuillan didn't want to lose any new business. "You never want to tell salespeople to slow down," he says. Yet his field work force of about 160 people was operating flat out.
Rather than add oodles of operations people, McQuillan struck a compromise. He hired a few new full-time staffers to help manage current clients. But then he hired a group of seasoned temporary workers to step in and handle the new accounts. McQuillan loves these workers, now numbering 20, whom he calls "plug and play" staffers. Some of them may eventually be hired on a permanent basis but, in the meantime, the afford Triumverate some much-needed flexibility.
"There's lots of talent to be had," McQuillan says. "Our HR team is working closer than ever with operations." In addition, McQuillan has hired about 18 more permanent employees, most straight out of college, but says they won't be ready for primetime for about 15 months. "Given the sales pipeline, we're under-hiring, but I'd rather strengthen relations with our current employees." (In April, the company lifted its moratorium on pay raises.)
2. Cross-train rather than add overhead.
TaxBreak is a Gadsden, Alabama firm that processes state and federal work-opportunity tax credits. The company's sales dropped along with new hiring. By the end of 2009, employer applications were down 30 percent. However, in May the company landed 73 new clients, close to its all-time record – and marked the beginning of a sales surge. (Some of the uptick in sales is due to the new federal HIRE law.)
Rather than hire more people to process those new-employer applications, CEO Shannon Scott relied on increased automation and a cross-training program put in place in early 2009 to handle sales spikes and backlogs. "Every employee is cross-trained to work in every other department," Scott explains. That means even salespeople and billing staff can work overtime in the processing department. "Heck, even I'll go in from time to time to pump out applications," laughs Scott.
A yearly team bonus for which all workers are eligible smooths over any reluctance to pitch in, plus all new employees start off in processing for their first 6 to 8 weeks. "Everyone helps each other and why would you grumble about that?" Scott says. The system has paid off. In the last year, the company has hired only two additional operations people even as its sales staff has increased to 43, and a national reseller program has been put in place. The company is now on track to gross $7.2 million this year.
3. Manage sales-operations conflicts.
Every company, whether a manufacturer or a service business, has lead times and backlogs. The effect of these lags on morale and team play can be very dangerous during sales spikes. As formerly parched salespeople revel in their role as rainmakers, they might promise too much too soon in their zeal to impress new customers and score commissions.
That zeal can end up putting them at cross-purposes with operations. During a crunch, says Stanford professor Hausman, sales and marketing people need to know the physical limits of the operations team. The easiest thing for operations to do is push back required lead times. But therein lies the conflict. "If the customer doesn't want to wait," says Hausman, "the salesperson is saying 'Geez my commission is going to be gone if I don't twist some arms.'"
In manufacturing, for example, typically one order on the floor can be pushed up and given first priority, he adds. "You can do it for one order, but not 10 at this special rate," Hausman adds. It's not necessarily a sales rep over-promising, either, he notes. Timing changes when the economy picks up and you need to make sure your sales team understands the changes in lead times that naturally occur. When salespeople are up to date on lead times, many conflicts can be avoided.
4. Give joint incentives to sales and operations.
At Triumvirate, CEO McQuillan acknowledges the tensions. "An abrupt restarting of the machine carries with it some friction," he says. His answer? Salespeople are compensated in part on customer satisfaction scores. Operational decisions are also based on those scores. That bond helps to eliminate tensions. In addition, the company holds twice-a-year retreats for operations and sales managers and staff. The most recent conclave in May took on renewed importance as the company hustled to meet the new demand.
Shannon Scott of TaxBreak has been known to resort to some more extreme measures to get sales and operations working together. Last summer, with a major deadline looming, the CEO challenged the whole company to a series of goals for new-client revenue, applications processed, and customer-service rankings. Scott told the employees that if they could hit the targets, he and the other executives would roast a pig and do a hula dance in grass skirts at the company picnic. He gave them 30 days. Not only did the staff win but the executives ended up with pie on their faces, literally.
5. Prioritize your new orders.
Customers are not all equal. A sales surge might be brief, so you can't ignore your long-term, big-volume clients. In fact, they should be your first priority. Be willing to quote longer-than-normal response times to lower-priority customers, recognizing that some of those orders may be one-offs or go away over time. A more appealing option, though, is to offer some customers a "split lot" when they don't need the whole order at once. "They might like it all at once but maybe just one-tenth of the order is needed right away," says Hausman.
6. Improve your sales forecasting model.
"Sales spikes aren't easy to handle," says Diane Parente, an operations expert and management professor at Pennsylvania State University. "But they are not as unpredictable as we think," she adds. "You can forecast sales, and even sales spikes can be historical." She urges entrepreneurs to make use of statistical models for sales forecasting, available on the Internet and through local university courses on operations management.
There are even forecasting models good for products with no history—such as the Bass Model of Innovation that takes into account factors such as innovation and imitation to project demand for a new product.
The key is to be able to weigh the trade-offs of several different scenarios. "What is the cost of holding inventory – just in case? What is the cost of lost orders? It is this type of analysis that will help us answer the questions before the situation becomes an emergency," says Parente.
7. Take a stress test.
Many companies have survived brutal declines in revenue through aggressive cost cutting and generating cash via reducing receivables and inventory and stretching payables. Unfortunately, such survival tactics can backfire when sales finally pick up. That's the thinking behind the Plante & Moran Liquidity Stress Test. Plante & Moran is a certified public accounting and business advisory firm based in Southfield, Michigan. The liquidity test, which is a free online tool, helps growing companies project their longer-term cash flow needs.
"A lot of people have their own strategy for predicting short-term capital," notes David Priestley, a consulting manager in restructuring and operations management at Plante & Moran. "They might say, `I have this in the bank, I know I have this receivable coming in next week and these payables for the next two weeks.'" But Plante's liquidity test looks months down the road. A typical scenario: You have to buy a bunch of inventory and you've got customers who might not pay for 60 days. Do you have enough working capital or the ability to borrow to meet those needs? The test can help you see just how unhealthy your cash situation might become. Priestly likens the cash-forecasting tool to "a home medical test that tells you if you really need to go see the doctor."
8. Plan for special cases.
A sales spike should not be a total surprise if the communication between customers, salespeople, and production is good. In her research, Parente found the relationship between sales and operations to be most critical in the case of "make-to-order" or "assemble-to-order" products. That's because salespeople transmit customer specifications directly to production. A strained relationship between the two departments can lead to miscommunication and ultimately lower customer satisfaction.