Wholesaling books for CEOs

◗ The Little Black Book of Strategic Planning for Distributors

Brent Grover

Modern Distribution Management/Gale Media, 128 pages

Grover’s “Little Black Book” covers the critical pieces of creating a strategic plan for a wholesale distribution company, including case studies, exhibits and end-of-chapter questions for the wholesaler-distributor’s management team. These days companies are almost always focused on “the now,” and the recession exacerbated that tendency. This book will help shift that mindset. Its insights will help distributors organize a strategic planning project, gather the needed information and build a one-page plan. Execution is the final step, and that is where many distributors fail. This book gives distributors what they need to put their plan into action.

◗ 5 Fundamentals for the Wholesale Distribution Branch Manager

Jim Ambrose

Amazon Digital, 149 pages

“5 Fundamentals” is a guide for wholesale distribution branch managers to help improve their business and leadership skills. Ambrose asserts that the branch manager is the key to success for wholesaler-distributors. Expectations for managers’ performance are higher than ever, and the traditional advancement from inside sales to outside sales to branch manager is no longer the assumed track. The branch manager who follows this track with no leadership skills will struggle as companies push for improved performance at the branch level. Regardless of the company’s structure, the branch manager will need the fundamentals outlined here to keep the company profitable and provide the best value for customers.

◗ 2012 Wholesale Distribution Economic Factbook

Modern Distribution Management

Gale Media, 192 pages

MDM’s “Wholesale Distribution Economic Factbook” is widely regarded as the best source for accurate statistics about the wholesale distribution industry, including segment and overall industry revenue trends, inventory levels, 2012 sales forecasts and other critical benchmark data. Executives who manage, sell to or invest in wholesale distribution companies can use this report to stay on top of key economic and market trends. The report is produced by MDM, which has been researching and reporting on the wholesale distribution industry since 1967. MDM uses that experience to compile an accurate, comprehensive picture of the wholesale distribution industry in this report.

Wholesale changes

The wholesale distribution business in the United States is changing at warp speed. The recession hit wholesalers hard; only the most robust, best-capitalized distributors made it through the downturn in good fighting shape, and now that they have emerged, they’re facing a flurry of new competitors and new technologies.

The biggest, strongest and smartest distributors — let’s call them the lucky few — are making the investments needed to keep pace with the changes. Many other distributors are looking for more affordable ways to stay relevant. And some are cashing in their chips and finding something else to do.

“Distributors’ customers’ demands are changing,” says Brent Grover, managing partner with Evergreen Consulting LLC in Cleveland. “They want to be able to call you or access your website and find out three things immediately: ‘Do you have the product I need?’, ‘What’s the price?’ and ‘When can I get it?’ And they don’t want to wait around for somebody to fumble through their system and figure out what the price is supposed to be.”

Brent Grover, Managing Partner, Evergreen Consulting LLC

Sophisticated online sellers with roots in retail, such as Amazon and Staples, have starting moving into some wholesale markets, and those sellers’ technological expertise has upped the ante for traditional distributors.

“Keeping up with those companies and their advanced systems requires a big investment in information technology,” Grover says. “The traditional ERP [enterprise resource planning] systems that distributors have been using don’t necessarily have the capability to provide all of these options to the customer. So distributors have to change their business processes and their support systems to make that happen. And it requires an investment in IT that some distributors may not be able or willing to make.

“But I think most of them will decide that they like adaptation a whole lot more than they like becoming irrelevant.”

The new technological requirements are forcing distributors to come up with answers to difficult questions and make tough decisions.

“It takes capital and management acumen to make these types of changes happen,” Grover says. “In the wholesale distribution business, the companies that are not big and well-capitalized have three choices in front of them: get bigger so they have the ability to afford these IT investments, get very specialized so customers will deal with them for reasons that don’t have to do with technology but because the customer needs their specialized knowledge, or get out — in other words, sell your business.

“All of this pressure, coupled with the low interest rates we’ve been seeing and the fact that banks have money to lend, has led to a lot of merger and acquisition activity in wholesale distribution.”

Guy Blissett, IBM Institute for Business Value

Guy Blissett, a wholesale industry expert with the IBM Institute for Business Value and a fellow with the National Association of Wholesaler-Distributors’ Institute for Distribution Excellence, underscores Grover’s points about the technological and economic shakeout taking place in the wholesale distribution business.

“We’ve seen the economic crisis drive many distributors out of business and damage others to the point where they’re struggling to grow now that the economy is starting to turn around,” Blissett says. “Unfortunately, some of those distributors now are not in a position to make the investments that they’ve been deferring.

“The key challenge that wholesaler-distributors face is simply continuing to drive their relevance in the supply chain. The traditional source of their value proposition — the ability to stock all the products their customers want and get those products into their hands quickly and efficiently — is still critically important, but it’s no longer enough. There’s so much transparency now with product pricing, product availability and individual company capabilities that distributors are having to think very differently about what will differentiate them over the next five to 10 years.”

The game changers

Amazon and Staples are the two most visible new players in the wholesale distribution market, and their technological sophistication is changing the rules of the game.

“AmazonSupply.com, in particular, has definitely had an effect on people’s psyche,” Grover says. “It’s not that they’re stealing everybody’s business, at least not so far. Our view of AmazonSupply.com is that it’s really for unplanned purchases of maintenance, repair and operating supplies for the noncontractor segment.

“Is AmazonSupply.com going to decimate anybody’s business? Probably not. Was it reasonable that the stocks of distributors, such as Grainger and Fastenal and MSC Industrial, took a hit when the news about the launch of AmazonSupply came out in April? No, it really didn’t make a lot of sense.”

Sensible or not, those distributors’ stocks did take a dive when the online giant came on the scene.

“When AmazonSupply.com was announced, the splash was that here was a business-to-consumer-style website appearing in the distribution world — and we all know about the bells and whistles Amazon has,” Grover says.

“Here they were repositioning themselves as a distributor, coming on-stream with prices that weren’t really low, but they were decent prices, and they were offering free two-day shipping for orders of $50 and up, which, I mean, that’s crazy, and a 365-day return privilege — a new feature. And they were offering a toll-free number to call during business hours for support, so you could actually talk to somebody at Amazon. That was a new thing. They’ve emerged with 14 different product lines and a half-million items in stock.”

Analysts who follow the stocks of publicly traded distributors overreacted to the news, Grover says.

“They reacted like, ‘Boy, this is terrible news for these distributors and AmazonSupply.com is going to come in and crush everybody,’” he says. “My personal view is I think that while AmazonSupply.com is the real deal and they’re going to be here for the long run, they’re not going to destroy anybody’s world, at least not right away.”

While Amazon is not expected to immediately cut a swathe across the old-line distributors’ business, the deep-pocketed gatecrasher has raised the technological stakes in the industry, and the other distributors will have to step up their games to compete effectively.

“The issue for distributors is that if they have an online portal, it’s probably something fairly rudimentary, a typical business-to-business-type Web experience,” Grover says. “The bar has definitely been raised by AmazonSupply.com bringing a business-to-consumer electronic commerce experience and putting it out there. For all of the other distributors, if they don’t have a good e-commerce portal, it’s going to make whatever they have look pretty bad. So they have to step it up.”

Blissett agrees that distributors will have to make serious investments to improve their e-commerce sites if they hope to compete with the new competitors moving in.

“Distributors have to ask themselves, ‘How do I sell my products to my existing customers, as well as new customers, using mobility, using the Web, using other channels of distribution?’” Blissett says.

“In some ways, customers’ demands are the same as they’ve always been — they’re just more acute now. So pricing continues to be key. Customers demand low prices. The difference now, I think, is that with more products being able to be purchased over the Web, price transparency has become a much more real tool that customers can use against distributors — if pricing is what they’re primarily focusing on.”

New ways to compete

There are several strategies that wholesale distributors are hatching to differentiate themselves in the new competitive landscape. An interesting new tactic is the use of vending machines to distribute supplies.

“This is a trend that’s just starting to emerge,” Grover says. “Distributors are placing vending machines in their customers’ industrial plants or in hospitals for nursing staff supplies. The employees use an ID card to get the needed supplies out of the vending machine.

“For example, in an industrial plant, let’s say a worker needs some safety goggles or some gloves. Instead of going all the way to the tool crib or having to fill out a requisition form, they can just go to the vending machine near their workstation and put their ID card in, and they can pick what they need out of the machine.

“It tracks who got the item and when they got it, and it also electronically signals the distributor when it’s time to replenish the machine.”

Blissett points to the use of data analytics as an exciting untapped opportunity for distributors to serve their customers in a new way in the future.

“Some distributors are looking at their role in the supply chain and the tremendous amount of information and data that flows through their organization and they’re realizing that can be a potential source of differentiation going forward,” Blissett says.

“They’re looking for ways to capture that data, do some analytics on it and turn it into something meaningful for their customers and suppliers. They’re starting to wake up to this potential and invest in it.”

Some distributors are envisioning that within the next five years they could reposition themselves as an information provider for their line of trade similar to companies such as IHS Global Insight and IRI Nielsen, Blissett says.

“They would be able to aggregate information from suppliers, information about customer interactions, as well as macroeconomic data and other information that they have access to,” he says.

“Their ability to pull all of that together, do some analytics on it and make some sophisticated forecasts and projections about where the overall economy is going and where individual facets of the economy and particular commodity prices are going — they could provide a lot valuable information by doing this.”

Economic modeling is just one area among many in which distributors could apply data analytics to create useful information for customers and suppliers.

“It’s essential, now more than ever, for distributors to understand their cost structure and all of the different activity-based costing elements of their supply chain and to be able to drive down the cost as much as possible, and then be able to go to their customers and have a fact-based conversation about that,” Blissett says.

“That allows a distributor to go in to a customer armed with a great deal of information and insight about their own cost structure and how things work, and they can use that to surface some inefficiencies in their customer’s supply chain that the customer might not even have been thinking about.”

Whether it’s in the supply chain, pricing, labor management, fleet optimization or customer segmentation, the opportunities for distributors to drive revenue to the bottom line via the application of analytics are many.

“We’re seeing many distributors make investments in this area,” Blissett says.

“As they get their basic data and their core IT infrastructure in place and they have either a packaged or a homegrown ERP system that’s robust and comprehensive and they can start to do some analytics on top of that, we’re seeing some exciting examples where distributors are challenging long-held perceptions about how to most efficiently move products through the supply chain and how to do things differently and capture a significant value along the way.

“Analytics is a potentially huge source of differentiation for wholesale distributors. Going forward, that type of role for these companies is pretty exciting.” <<

How to reach: National Association of Wholesaler-Distributors, www.naw.org; IBM Institute for Business Value, www.ibm.com/services/us/gbs/thoughtleadership; Evergreen Consulting LLC, www.evergreenconsultingllc.com

Manufacturing picture for 2013 looks strong overall

Stuart Hoffman, Chief Economist, PNC Financial Services Group

U.S. manufacturers should continue to fare well in 2013, although next month’s election is a wild card that could change that outlook to some degree.

“U.S. manufacturing should do well next year, but a lot depends on the election and policies that the newly elected president and Congress may or may not undertake,” says Stuart Hoffman, chief economist, PNC Financial Services Group. “We’re assuming that some of what’s being called the ‘fiscal cliff’ will probably go into effect but not enough to be fatal to the economy.”

Hoffman expects that most manufacturing sectors will continue to do well, including household goods, energy-related manufacturing, farming equipment and nondefense aerospace manufacturing. Construction-related manufacturing is expected to be a particular bright spot, and automobile production should continue to fare well, though less robustly than the last couple of years.

“We think auto production will still be rising, so auto manufacturers and the related supply chain should do well,” Hoffman says. “It won’t be a big increase over this year. The rate of increase for next year will probably be around 5 percent, whereas this year it’s double-digits.

“But auto production will still be operating at an overall higher level — a higher production level, a higher employment level, a higher productivity level and, ultimately, a higher sales level.”

A few manufacturing sectors are expected to cool down, including heavy truck production, tool and die, defense aircraft (though that too depends on the direction of post-election government policy) and raw materials such as steel, copper and aluminum.

“Production of raw materials is more of a global issue, and while we don’t expect the global economy to fall into recession, we have seen global problems with steel slowing down and a tremendous amount of supply,” Hoffman says. “Some steel companies might not be all that profitable because of the increase in supply, and global supply could easily meet if not exceed the rise in demand.” <<

To learn more, listen to Stuart Hoffman on PNC’s 2012 National Economic Outlook webinar on Nov. 8. To register, go to www.csvep.com/pnc/110812flyer.html.

The manufacturing surge has slowed, but some resilient trends keep pushing it forward

While the U.S. manufacturing sector has been resurgent for three years and counting, the recovery cooled a bit in the third quarter — and there’s no clear consensus among experts as to the reasons why. The reasons for this leveling off are varied and complicated.

Many experts have lists of theories to explain the slowdown, but there’s a lot less consensus among these authorities’ theories than you might expect. There is one commonality, however, among the experts’ opinions. They remain guardedly optimistic that the rebound will continue but at a slower pace.

“We’re definitely seeing a little bit of a blip in our multiyear recovery over the last couple of months,” says Chad Moutray, chief economist for the National Association of Manufacturers.

“What’s causing that blip is uncertainty — uncertainty caused partly by the ‘fiscal cliff’ everyone has been talking about, partly by the [economic] problems in Europe and a few other factors. We haven’t solved these problems yet, and it doesn’t look like we’re going to be solving them anytime soon, so that’s a headwind that we expect is going to be persistent over the next few months and probably longer.”

What happens domestically over the next few months will be hugely important for U.S. manufacturers over the next year or two. That includes next month’s election, how steep the so-called “fiscal cliff” drop-off turns out to be at the beginning of 2013, and then the subsequent direction of the U.S. economy thereafter.

“The biggest unknown out there right now for the U.S. economy is the ‘fiscal cliff,’ and the fact that on Jan. 1, assuming that Congress doesn’t act between now and then, we’re going to see tax increases and spending cuts of around $500 billion to $600 billion,” Moutray says. “That obviously could have some dire consequences for the economy. We’ve had the Congressional Budget Office and a lot of others saying we could have a recession early next year if that’s the case.

“We’re seeing a lot of people in Washington angling to see if they can try to avert that. But there’s an enormous amount of pessimism that that’s going to happen. So that’s a key thing manufacturers are worried about: the uncertainty over what their tax rates are going to be and what the regulatory environment will be like next year.

“People are very engaged in what’s happening in the U.S. election because it obviously will impact manufacturers deeply.”

Nonetheless, Moutray says that on the whole, U.S. manufacturers’ outlook for 2013 is positive but guardedly so.

“Of course, that could all change very quickly,” he says. “We’re seeing some pessimistic numbers coming out right now, which I think should be a wake-up call to folks in Washington that, ‘Hey, maybe this is something we’d better act on. We need to reduce the level of uncertainty in the economy that’s out there.’ ”

Scott Paul, executive director of the Alliance for American Manufacturing, agrees that a large number of concurrent factors have conspired to flatten the U.S. manufacturing curve. One crucial factor he points to is import-export problems with both Europe and China.

“One thing that was helping to drive the boomlet in manufacturing over the last few years was increased demand for our exports to Europe and to Asia,” Paul says. “A key reason for that has been that our exchange rate has been, while not perfect, much more suited to exports than it used to be.”

But the days of gangbuster exports to Europe and China are fading.

“We’ve seen that tailing off dramatically over the last couple of months,” Paul says. “The Chinese are reverting to their traditional strategy of continuing to produce and export as much as they can regardless of what the demand is. That creates problems for other countries such as the United States. At the same time, we’re seeing the value of the Chinese currency take a nosedive. That, to me, is troubling.”

Exacerbating this set of complications coming from Asia is a different kind of economic headwind pushing across the Atlantic from Europe.

“Some of Europe is headed back into a recession again, related to the debt crisis financial situation,” Paul says. “That has an impact on demand, on unemployment, on a lot of things. And that, in turn, impacts U.S. manufacturers, because Europe is an important market for us.”

Swinging inventory

Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation, is another insider who attributes the U.S. manufacturing slowdown to a convergence of several factors. Waldman postulates that the key factor was the sharp inventory fluctuations that took place during the recession and in the years since.

“Over the last three to four years, the U.S. economy had probably the sharpest inventory swing in modern history,” Waldman says. “During the panicky days of 2008 and 2009, inventories were liquidated very rapidly. Some companies were liquidating inventories just to raise cash.

“So then, even though we had just a modest turn in the economy after the recession, there had to be a rapid restocking of the shelves just to handle that moderate traffic. That got our factories humming again. If you think about it, manufacturing essentially produces inventories for the economy. So that helped a lot.”

Now, though, the manufacturing sector has caught up with the shelf shortages, so the inventory catch-up surge that got the factories buzzing is dying away.

“The inventory swing is finite,” Waldman says. “Eventually the stocks on the shelves reach short-term equilibrium with the pace of sales. It’s a one-shot deal, in effect. It comes back to equilibrium.”

Another factor in the slowdown has been economic volatility in countries that Waldman labels emerging markets.

“After the recession, we had a stronger and a faster rebound in emerging markets, particularly some of the larger emerging markets, than people had thought,” he says. “China, India, Brazil, Mexico — these markets all felt the downdraft of the crisis in the industrialized world, and they certainly slowed.

“But they implemented policies rather quickly and came back rather quickly. As we all know, over the last decade, U.S. manufacturing has been making a lot of investments in those markets, and the health of those markets has been increasingly important for U.S. manufacturing profitability. This helped propel manufacturing into a more normal recovery than almost any other sector of the economy. That’s why manufacturing was able to lead the recovery.”

However, that’s another development that can be added to the list of trends that drove the manufacturing rebound but have now begun to slow down.

“Now, the storyline is changing,” Waldman says. “The global situation is troublesome, particularly for manufacturing. The activity in the emerging markets is slowing dramatically. That’s why we’re seeing that manufacturing is not really the leader anymore. It’s starting to get mixed up with the troubles of the U.S. and the global economies.”

Durable drivers

But not all of the recovery-driving trends are disappearing. Some look like they’ll have staying power, and that endurance should, barring other unforeseen problems, continue to keep the U.S. manufacturing rebound at least somewhat on track.

Exhibit 1 — leanness and efficiency: “Manufacturers have been able to take advantage of being much more lean and efficient, which has improved their overall competitiveness,” Moutray says. “When I look at the sectors that have done well the last couple of years, I think they’ve taken advantage of exports, which speaks to that level of increased competitiveness.

“Exports are going to be an evermore important part for the manufacturing sector. I think we’re going to continue to find ways that we can better compete.”

Another manufacturing-positive trend expected to have staying power is U.S. manufacturers’ increased competitiveness, which is being fed by several factors: advances in technology, consequent gains in productivity and decreases in costs, particularly energy costs.

“We definitely have seen a little bit of a sea change in terms of the overall competitiveness of U.S. manufacturing,” Moutray says. “Nearly every manufacturing sector is becoming more efficient by using technology. That’s why we’ve seen such huge gains in overall labor productivity the last few years.

“U.S. labor productivity grew more than 5 percent in the first quarter of this year. In the durable goods sector, it was almost 10 percent. Those are unheard of levels of labor productivity growth, and as a result, we’ve seen the overall cost of labor per unit fall dramatically. That has helped keep U.S. manufacturing more competitive.”

Declining energy costs have also been a boon to U.S. manufacturers’ attractiveness relative to foreign competition.

“Another key reason why we’ve seen this boomlet in manufacturing is that energy costs have come down with so much natural gas coming online,” Paul says. “That, in itself, has spawned an industry: supply pipe that goes into the natural gas. But more broadly for manufacturing in general, especially energy-intensive manufacturing sectors, it has helped to bring down their energy costs. And I see that continuing to be a very strong factor.”

Reshoring is another trend expected to have some durability, and thus continue to help U.S. manufacturing sustain its recovery to some degree, Waldman says.

“What appears to be happening — and underline appear, because it’s still in its early stages — is that for global manufacturing supply chains, which are spanning many countries these days, the U.S. is playing a somewhat better, stronger role in terms of production in those global manufacturing supply chains,” Waldman says. “It’s being driven by multinational decision-makers. When they look at the map of their world, U.S. manufacturers are looking more attractive.

“That’s because there are a lot of hidden costs to doing business and to having a production presence in a low-wage economy, and those costs are now becoming less and less hidden. And while the benefits of market potential in emerging economies are tremendous and always will be, these multinational decision-makers are beginning to realize that the costs are a little higher than they thought, so that puts the U.S. and North America in a better position.

“This is clearly a positive for the strength of U.S. manufacturing, and it’s something I think the United States needs to see as a glimmer of light and to capitalize on.”

Policymakers are expected to play a crucial role in the coming years in terms of whether the manufacturing sector continues to recover and perform well.

“We’re in a time that’s somewhat similar to just after World War II, in the sense that policy matters a great deal these days,” Waldman says. “And not just U.S. policy; central bank policies and fiscal policies around the world are absolutely crucial now.

“We’re also in a time where you have to watch policymakers. Manufacturers in the U.S. might have thought some time ago that monetary policy in India or in Europe or even in the Federal Reserve was a bit removed from their business, a bit arcane. Not these days. They need to follow it. It’s crucial. And the same holds true for fiscal policies.

“Over the long term, getting past the sluggishness and the challenge of this year and the next couple of years, we need to make policies that engender long-term investments in our workforce, in innovation, in technologies. So policy around the world matters more to manufacturers now than it has in a generation.”

In the big picture, the resurgence of U.S. manufacturing during the last three years has changed the way the public and political leaders view manufacturers and their role in the economy and in society, and that bodes well for the future of the domestic manufacturing sector.

“I think it’s healthy that we’re hearing more talk about the importance of manufacturing than we have in the past by everyone,” Paul says. “There’s this realization that it has to be part of our future, and everyone — particularly those in leadership positions — seems to be embracing that. I think that’s a very good thing.” <<

How to reach: National Association of Manufacturers, www.nam.org; Alliance for American Manufacturing, www.americanmanufacturing.org; Manufacturers Alliance for Productivity and Innovation, www.mapi.net

Manufacturing-related books for CEOs

◗ The 12 Principles of Manufacturing Excellence: A Leader’s Guide to Achieving and Sustaining Excellence

Larry E. Fast

Productivity Press, 266 pages

“The 12 Principles of Manufacturing Excellence” provides a practical approach for implementing and sustaining business strategies that promote manufacturing excellence. The author explains how to inspire top-notch performance while creating an atmosphere that encourages leadership and mentoring.

He provides examples that illustrate how companies have achieved vertical and horizontal alignment, he explains how to instill a culture that sustains high-quality and world-class performance via 12 principles of manufacturing excellence, and he provides methods to track progress by plant and by function, emphasizing lean manufacturing and Six Sigma tools to improve manufacturing operations.

◗ The Toyota Way to Lean Leadership: Achieving and Sustaining Excellence through Leadership Development

Jeffrey Liker, Gary Convis

McGraw-Hill, 272 pages

Many companies across the globe have adopted lean manufacturing practices but few have attained or maintained the levels of excellence that Toyota has. “The Toyota Way to Lean Leadership” sheds light on some of the reasons for this.

Liker and Convis (the former is the author of the popular “Toyota Way” series, the latter a former executive VP and managing officer of Toyota) offer practical ways for executives to spur their employees to focus their efforts on collaborating with co-workers to drive continuous improvement throughout the organization. Case studies demonstrate the methods Toyota uses to produce powerful, capable lean leadership.

◗ Supply Chain Transformation: Building and Executing an Integrated Supply Chain Strategy

J. Paul Dittmann

McGraw-Hill, 256 pages

As manufacturers expand their offerings and look for new ways to lower their cost structures, the complexity of their supply chain naturally increases. “Supply Chain Transformation” tackles this issue head-on, introducing a strategic framework aimed at helping manufacturers develop a first-class supply chain strategy.

Dittmann presents nine clear, concise steps for manufacturing executives to follow as they retool to improve their company’s management of supply chain dynamics. The book contains numerous real-world examples that illustrate the difficulties inherent in gaining organizational support for the major investments involved in reworking a company’s supply chain strategy. <<

Steve Christian: Special Report on Accounting

Steve Christian, Managing Director, Kreischer Miller

An accountant can serve many types of roles for CEOs, from hands-off keeper of the books to proactive, fully engaged adviser. It’s up to executives to decide how heavily they want to rely on their accountants. But in general, the more interaction they have, the fewer financial surprises they’ll run into.

“If you want to derive the most benefit, you have to work with your accountants year-round,” says Steve Christian, managing director at Kreischer Miller. “If you just want a scorekeeper who prepares a financial statement and a tax return and don’t want to include him in your team of advisers, you certainly don’t need to. But most progressively minded companies try to surround themselves with good advisers. And the way you become a good adviser is to intimately know the company you’re advising and spend as much time with them as you can, 365 days a year.”

Often, accountants can steer a company clear of pitfalls that might have adverse tax or financial consequences.

“Sometimes you enter into a transaction — you buy a company, you buy some equipment, you do something related to a transaction — and it will have some negative impact as to the financial statement or the tax returns,” Christian says. “Our value takes place by guiding you through the impact of transactions, as opposed to the value of preparing a return or preparing a financial statement. That’s why we really think you need to call us before you act rather than after you act.”

Advice on best practices in a client company’s market sector is another area in which accountants can provide value.

“CEOs know their companies intimately, but unless you belong to a peer group or something like that, you may not have many opportunities to see what best practices other companies are utilizing,” Christian says. “Meanwhile, your accounting firm may support 1,000 different clients out there. So while we may not have the answers to everything, we can tell our clients what we’re seeing is happening with other companies, and they can use that information take advantage of best practices.”

Steve Christian, managing director with Kreischer Miller, has a range of experience providing business advisory, audit, accounting and tax services to a variety of businesses, including privately held companies, partnerships, and SEC registrants.

HOW TO REACH: Kreischer Miller, www.kmco.com or (215) 441-4600

Mark LaPlace: Special Report on Accounting

Mark LaPlace, Director of Tax Services, GBQ Partners LLC

An accountant can serve many types of roles for CEOs, from hands-off keeper of the books to proactive, fully engaged adviser. It’s up to executives to decide how heavily they want to rely on their accountants. But in general, the more interaction they have, the fewer financial surprises they’ll run into.

“If you think about just the tax piece of it, the tax law changes so fast and it’s so politically charged that it’s a bit of a lightning rod for an awful lot of what’s going on,” says Mark LaPlace, director of tax services with GBQ Partners LLC. “The speed with which some of these law changes take place significantly impacts the way executives operate their businesses. So that makes having regular dialogue with your financial team paramount.”

With the upcoming election and with several federal tax provisions set to end this year, tax rates are going to change dramatically next year.

“The query then becomes what decisions that CEOs are contemplating making might have a very different tax result if the decision is made in 2012 versus 2013,” LaPlace says. “You want to try to avoid some of the rate changes that are already on the books that are going to take place next year. You could do this by accelerating income, accelerating stock options or — even though this is a bit of a counterintuitive position — you might want to defer certain tax deductions because next year’s going to be a higher-rate year.”

LaPlace says his firm has begun factoring regularly scheduled meetings into its proposal process when taking on new clients.

“We’re proposing that we meet at least quarterly and, ofttimes, more often than that, depending on the size of the company,” he says. “We’ve gotten very systematic in our shop in saying that’s part of our process of accepting a new client. We lay it out there up front. And we’ve been amazed at how this creates great dialogue, which then avoids some of the negative circumstances you can run into. We’re finding this to be a very effective technique.”

Mark LaPlace, director of tax services with GBQ Partners LLC, specializes in tax planning and consulting for middle market and entrepreneurial companies, and tax and financial planning for professional athletes and other high-net-worth individuals.

HOW TO REACH: GBQ Partners LLC, www.gbq.com or (614) 221-1120

Leif Erickson: Special Report on Accounting

Leif Erickson, Associate Tax Director, SS&G

An accountant can serve many types of roles for CEOs, from hands-off keeper of books to proactive, fully engaged adviser. It’s up to executives to decide how heavily they want to rely on their accountants. But in general, the more interaction they have, the fewer financial surprises they’ll run into.

“The more contact we have, the better,” says Leif Erickson, associate director in the tax department of SS&G. “It’s really crucial, especially right now, with everything that’s going on. There’s so much uncertainty out there with regard to the tax law and the new things that are coming on the horizon.”

A key area that Erickson says he’s been helping clients with is business combinations, in which a companies seek to buy a portion of another company and they need to decide whether to structure the transaction as a stock acquisition or an asset acquisition.

“Getting us involved on the front end can help to at least lay out the tax consequences of structuring the transaction this way or that way,” Erickson says. “And a lot of times, the tax ramifications are not necessarily at the forefront; the tax side isn’t really going to be the driving force behind the decision. But it’s at least something that the CEO and CFO can think about — these are the things that are out there, these are the benefits, these are the things that maybe we want to negotiate as part of the deal.”

Another important area is inventory management, especially when inventory quantities rise quickly over a short period.

“A client recently came to us, and they’d had a tremendous spike in their inventory and were experiencing tremendous price increases,” Erickson says. “So we looked at it, and we said, ‘Have you looked into LIFO [last-in, first-out inventory accounting]? They hadn’t given it much thought. By switching them over to LIFO, it produced huge savings. The first year, I think we got a $700,000 reserve for that client, so that was an added deduction of $700,000. We were able to turn it into a big positive with regard to the tax side of things.”

Leif Erickson, associate director in the tax department of SS&G, specializes in corporate and individual tax planning, FAS 109 calculation, LIFO studies and cost segregation studies.

HOW TO REACH: SS&G, www.ssandg.com, (330) 668-9696

Reliable counsel

How often do CEOs need to talk to their accountants in order to effectively manage their company’s finances? Obviously, this question can’t be answered with a simple blanket statement: “X times a year for a total of Y hours should do the trick.” There are too many different types of businesses, each with different amounts of expertise and unique needs of their own.

But if you talk to even a small number experts in the accounting field, a couple of themes emerge. One is that when CEOs are contemplating unusual transactions, it’s always better to err on the side of having too much contact with their accountant than not enough. Another refrain is that any time a CEO has any doubts or unease about an upcoming transaction, it’s definitely time to call your accountant to let him or her know you have something you need to talk about.

“Typically, in a larger company, the CFO would take on that role,” says Mark Koziel, vice president of firm services and global alliances for the American Institute of Certified Public Accountants. “But what about the CEO who doesn’t have the C-suite and the finance function inside their organization? That’s where, in particular, we talk a lot about being the trusted business adviser for that CEO. Especially in family-owned businesses, you see this a lot. You need that financial adviser, but you may not need them full time, so you can lean on your CPA on a regular basis throughout the year.

“They should be there for part of the strategic planning sessions. If the CPA knows what’s going on throughout the year and is present for discussions about important things like expansion, employment and succession, then they can be better informed for when they do the year-end planning and consulting.”

The benefits of touching base periodically with clients throughout the year, not just at year end, is a common theme among those with experience in the accounting field.

“When you meet with clients during the year, you can go over their financial statements, among many other things,” says Sharon Cook, president of the National Society of Accountants. “You can make sure they are doing everything properly. And you can make suggestions about some of the other things they need to do, for taxes and for other financial purposes.”

Think, talk, transact

Talking to your financial team throughout the year enables your experts to make suggestions in advance of key transactions that can greatly alter the tax and financial impact of those decisions.

“When you get to year end, depending on what the CPA is doing for you — if it’s a compiled financial statement, an audited financial statement, a tax return — there are definite tax implications that could be affected,” Koziel says. “And maybe some decisions would have been made another way if the CEO had considered the tax implications of what they were about to do.”

Making assumptions on your own rather than asking professionals for guidance can lead to unpleasant surprises. Accountants come across these types of situations frequently in their daily interactions with clients.

“A situation that I find clients often have problems with is, for example, in a year in which they’re expecting a large profit, they want to be able to reduce that,” Cook says. “So one of the first things they think about buying is a car, because they think they’re going to be able to write that car off in full in the first year. Then, by the time you get the books and you’re ready to do the tax return, you have to tell them, ‘Guess what — you’re not going to be able to do that. You’re going to have some limits in terms of what you can deduct this year.’”

For many types of nonroutine transactions, getting advice beforehand from your accountant or finance team is almost always the wisest course for business executives to follow.

“Some of the types of transactions that should be discussed ahead of time would be, for instance, any type of big-dollar purchases that they’re looking at,” Koziel says. “Buying versus leasing is one that needs to be looked at carefully, such as whether you want to buy or lease a building. Another important one is business expansion: If they’re looking to buy a business or even sell their business, the whole M&A transaction and how that will take place is a very important thing to consider.

“Major investment decisions along the way could have significant impact. And succession of the business — that’s another huge issue. You should be having big-time conversations about that early on.”

Other nonroutine transactions that should be reviewed carefully ahead of time include borrowing money, major equipment purchases and like-kind exchanges.

“Before you do a like-kind exchange, you should definitely talk to your accountant to make sure it’s done properly so it won’t be disallowed somewhere down the line,” says Cook. “There are many types of like-kind exchanges. It could involve property that they own. A lot of times, especially in smaller businesses, it may involve cars or equipment that they have around, where they can exchange it and therefore not pay the tax that they would have had to pay if they had sold it directly to someone else.

“Any time a CEO wants to make a big expenditure on any kind of equipment, they need to talk to their accountant to make sure they’re getting the benefit of everything they have, especially if they want to borrow money to pay for it. Because if they want to borrow money, they’ve got to figure out, ‘What is that going to do to my bottom line? Is this something I really need to do, and is it right for me?’”

Multifaceted advice

An accountant’s value to a CEO or a client company isn’t limited to figuring out the tax effects of transactions before they’re entered into. There are many other types of general business issues for which an accountant can provide valuable advice.

“Strategic planning is a big one,” Koziel says. “One of the best services a CPA can provide to a CEO is to just get them in a room for a day and sit down and talk about the business. Do a strategic planning session. Make it formal, kind of like a board of directors meeting.

“Having frequent conversations throughout the year is useful in many ways. The beauty of the CPA environment is you gain a lot of knowledge about particular industries. Take construction, for example. Typically, the CPA has more than one construction contractor client, so they see good habits and bad habits that are out there, based on other businesses in that market. And they also can sometimes translate things to other types of businesses. Maybe it’s a customer service strategy in a certain retail business that could be replicated in, let’s say, a not-for-profit that you might have as a client.

“The ability to observe how a variety of different businesses operate and being able to assess the good habits from the bad habits and recommending the good habits to other types of businesses that are in their client base — these are valuable services that CPAs are in a position to offer.”

Another important service that accountants can provide is keeping tabs on key financial line items to watch for significant changes, then investigating those changes to determine the factors that are causing them, and, if needed, recommending ways to counteract the changes.

“If you keep in close contact with your clients, especially if they’re doing their own accounting in-house, one of the things you can do is review their gross profit percentages,” Cook says. “Are they staying consistent? Are they changing dramatically from one period to another? What’s the cause of that? And you can sit down and go over that with them and see if there’s a problem. It may be in their inventory control, if they have inventory. Or is the cost of their regular purchases going up? And if so, what do they need to do to offset that? Does that mean that they need to find a way to increase sales? Or do they need to have better controls on what’s in inventory and how it’s coming out of inventory?”

The definition of trust

One of the accountant’s main goals is to achieve trusted business adviser status with his or her clients. It’s a prestigious standing, and it must be earned over time.

“It’s about giving your clients the absolute best service you can provide,” Cook says. “To be able to review and make sure they’re handling their affairs properly, to produce good financial statements, to have the best possible relationship between the accountant and the CEO, and ultimately, to make sure that their business prospers. That’s the key. That’s what you aim for.”

Koziel concluded by telling a story — “the ultimate story of a CPA as a trusted adviser,” as he calls it.

“I was at lunch with a CPA friend of mine about a month ago, and he says to me — because he’s heard me say time and again: ‘Trusted adviser, trusted adviser’ — he says, ‘You know, I never really understood the meaning of “trusted adviser” until just this past weekend. I got a call from the wife of a client of mine. The client is a construction contractor; he owns a construction business.’

“This guy was a huge car buff and had a warehouse full of antique cars. He was in the warehouse tinkering one day, and he fell to his death off of a ladder — changing a light bulb, of all things. So he says to me, ‘I’m sitting there last weekend, and this client’s wife calls me. … A little while later, I’m in her living room. It’s the wife, the two daughters, the two son-in-laws and me.’ He says, ‘That is the trusted adviser relationship. That’s exactly what you’ve been talking about. The only one that they felt comfortable enough with — the only one they felt confident enough with as the outside consultant to the family — was me. It’s almost like I was part of the family.’

“That’s the type of relationship that you start to see in these businesses with their CPAs,” Koziel says. “And as a CEO, if you don’t have that trusted adviser relationship now — well, we’re talking about your life’s savings. Whether it’s invested all in the business or whether it’s held in other types of assets — these are your life’s savings. Who are you going to trust with those types of decisions? And you’d better have that person with you year-round, to help you make better decisions all along the way.”

HOW TO REACH: American Institute of Certified Public Accountants, www.aicpa.org; National Society of Accountants, www.nsacct.org

Marty Doerr: Special Report on Accounting

Marty Doerr, Member-In-Charge, Tax Services, Brown Smith Wallace LLC

An accountant can serve many types of roles for CEOs, from hands-off keeper of the books to proactive, fully engaged adviser. It’s up to executives to decide how heavily they want to rely on their accountants. But in general, the more interaction they have, the fewer financial surprises they’ll run into.

“I’ve been on both sides of the aisle,” says Marty Doerr, member-in-charge of the Tax Services Group of Brown Smith Wallace LLC, who earlier worked for a decade and a half as head of the tax department at May Department Stores. “I would just say, from a CEO perspective, it’s really helpful if he includes his CPA, whether it’s in-house or his adviser, as part of the team. Sometimes the CEO thinks of the taxperson as the guy who’s supposed to give him the answer after he’s given him the facts. But they need to be involved in helping create the facts.”

Sales of real estate and major asset purchases are two of the critical transaction types for which business executives should seek expert financial advice beforehand rather than afterward.

“You can’t have that input unless you’re at the table when they’re doing the transaction,” Doerr says. “That’s what I mean by being on the team. It can save a lot of hassles and probably taxes and maybe penalties, if you can weigh in before those transactions have already happened. It’s a matter of having somebody there who has their tax antenna up all the time.”

The unpredictability involving the upcoming election and how it will affect next year’s tax rates makes CEO-accountant interaction even more crucial this year.

“It’s so uncertain right now what’s going to happen with [tax] rates,” Doerr says. “Of course it’s an axiom that you don’t let the tax issue wag the dog, but most people think rates are going to go up next year. And any time we’re into that kind of a situation, particularly in an election year, it makes tax planning that much more difficult. So I would encourage management to keep the dialogue open.”

Marty Doerr, member-in-charge of the Tax Services Group of Brown Smith Wallace LLC, is responsible for overall client service and technical oversight of the tax practice, as well as training staff on best practices and new tax developments.

HOW TO REACH: Brown Smith Wallace LLC, www.bswllc.com or (314) 983-1200