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Companies should heed lesson from frigid winter's impact on profits

TORONTO - Severe winter weather should be seen less as an excuse for poor performance and more as opportunity by companies to fix problems before Mother Nature brings any more surprises, management experts and others say.

"The weather is being used a lot more this year as an excuse, whether it's real or not," said Adrian Mastracci, a portfolio manager with KCM Wealth Management Inc. in Vancouver.

"Everybody's getting into the weather bandwagon ... even (U.S. Federal Reserve chairman) Janet Yellen was talking about the weather. Maybe the weather bandwagon is being overdone."

Sectors from retail to restaurants and transportation have blamed the weather for less-than-stellar earnings during the past few months, with companies including Canadian National Railway, Canadian Pacific Railway, Red Lobster and Sears commenting on the role of winter in their results.

The winter season, characterized by record low temperatures, ice storms and heavy snowfall across the country, closed stores and restaurants for days at a time, shut down major transportation routes and kept consumers housebound.

But Mastracci and Fraser Johnson, supply chain and operations management expert with the Ivey Business School at Western University, both say that while the weather undoubtedly caused headaches for many companies, it's not the only culprit.

"At the end of the day, it's always a management issue," said Johnson.

"We can't control the weather but we can control our ability to be able to react to problems related to the weather: problems related to natural disasters, a problem related to an unexpected disruption in the supply chain, which could be as minor as a truck breaking down while it's in transit."

He says this winter should be seen as a wake-up call to organizations, prompting them to think about how to improve the way their goods are delivered from suppliers.

Companies such as Canadian Tire, he notes, have worked out a sophisticated inventory systems and profited from the same winter wallop that has hurt others.

The Toronto-based retailer saw a 17 per cent profit surge in the fourth-quarter as customers flocked to its stores to load up on everything from ice chippers to power generators, salt and tobaggans.

Even before the bad weather hit, however, another major retailer, Target Corp., "dropped the ball" on its Canadian launch because of inventory issues that shouldn't have occurred and took too long to resolve, Johnson added.

"Part of the problem that we have is that organizations have become very lean over the last two decades or so; they've reduced their inventories," said Johnson.

"In a global supply chain, when you have anything from bad weather or border problems or a natural disaster, it tends to have a ripple effect."

David Kincaid, chief executive of Toronto-based consulting firm Level5, said the companies that bucked the trend have built up an appropriate range and inventory level on merchandise associated with a severe weather spell. They are also the agile retailers that can quickly fill a need or address a problem, he said.

But it isn't just retailers that have suffered. This has been one of the worst years for flight cancellations in both Canada and the U.S. And storms that shut down major highways delayed the delivery of parts to manufacturers and the shipment of finished products to market.

"The automotive industry in January and February was hit really hard by the bad weather," Johnson said.

"Every minute a typical car plant will produce an automobile, so the cost of shutting (it) down has huge financial implications for the organization."

According to Johnson, there are measures companies can take to avoid similar problems next year. He suggests ensuring inventory is available in strategic positions in supply chains, so that companies are not held hostage by weather-related problems, as well as working with suppliers to have inventory available in locations close to the company's distribution centre.

It's also possible that this downside will bring some upside in the spring, as manufacturers try to make up for lost production and customers are eager to enjoy the sunshine and return to stores, he said.

But Kincaid warned companies against trying to make up for low volume by cutting prices, saying that while such a move may draw customers in, it will make them unwilling to pay higher prices when inventory levels return to normal.

"The (retailers) that aren't completely using price as the mitigator to their shortfall are likely the ones that, come spring, are going to benefit," he said.

The Canadian Press


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