Is Dollar General Ready for Prime Time, Again?

By Bruce Erickson, C.P.M.

November 3, 2009

Dollar General has announced an IPO due out in the next couple of weeks. The small box retail giant has been private since July of 2006 when an investment group bought the shares out. In order to raise capital to reduce debt, the firm is offering 22.7 million shares of stock to raise revenue. In addition, owners are selling 11.4 million shares of their own. It was interesting that in the prospectus they mentioned that DG had no dividend plans for the future. But they did declare a special dividend a couple months ago for over $263 million. At a sale price right about where they left off in 2007, the question is, is investing in Dollar General a good idea?

Considering that the economy has driven many to the dollar stores, it would seem like an opportune time. But there are two lingering concerns in the case of Dollar General. The transaction will create a half billion dollars in equity to pay down debt. But with $4.4 billion on the books, this doesn't get them out of the woods. With a debt to equity currently at 2.3, they are leveraged twice as much as competitor Family Dollar. The pickup form the new equity will only drop them to 1.6, better but still dependent on adding new stores which requires utilizing additional letters of credit.

Not mentioned in their prospectus is what they intend to do about their lagging information systems. Without an overarching ERP system to drive efficiencies in all operations, Dollar General relies on several management systems for individual operations. Although they have cracked the code on opening new stores quickly and efficiently, the store manager is still limited to a clipboard for many inventory management tasks. For more information on their information systems, download our full case study at http://bit.ly/16vDrg

Finally PMI Breaks the 50% Barrier

"Economic activity in the manufacturing sector expanded in August" for the first time in 18 months according to an ISM report on business. Good news for consumers who have been holding their breath so long their turning blue. PMI, the Purchasing Manager's Index hit 52.9% in August. 50% marks a manufacturing economy at break even. Finally, the economy is actually expanding. New orders are growing 9.6% faster than July and production has improved 4%. However, don't look for an immediate employment turnaround. Typically, employment rises several months after corrections in the PMI. August employment slowed but at a slower rate than July.

Think of manufacturing as a ship making a right turn. We need about five miles to make it happen. More good news includes a shortage of customer inventories and rising exports.

On the non-manufacturing side the market is still contracting at a slower rate indicating course correction in the right direction but still going the wrong way. The NMI (Non-Manufacturing Index) was at 48.4% in August up from 46.4% in July. The brightest spot is new export orders that actually expanded in August with an index of 54%. To read the whole report, go to ism.ws.

 

 

Four Reasons to Consider Outsourcing Purchasing

The concept of outsourcing your purchasing or supply chain efforts within the homebuilding industry may seem foreign. But upon closer inspection, you may discover that the opportunity makes a lot of sense. Let's take a few minutes and look at for key skills that NEMAsource can add to your organization beyond the obvious.
 

Pursuing Entrepreneurial Creativity

Considering all the business types as a whole, perhaps few can claim to be more creative than the custom home builder. Carefully crafting a homebuyer's dreams into a million dollar reality is their mainstay. This requires a creative entrepreneur. On the other hand, the vendors who hone this idea into a completed product are also of a creative mindset. Homeowners seldom stop to consider the gyrations that the builder, framer and air conditioning contractor had to go through to get vents to that remote corner. But they did it.

Purchasing within this environment requires no less entrepreneurship. Oftentimes, the solution is not as much a mathematical tactic as it is a face to face conversation on the supplier's plant floor improving safety, lowering his insurance modifier, reducing cost.
 

More than Looking at the Lowest Price

NEMAsource is constantly looking at ways to help their suppliers improve. True negotiating involves asking the important questions to suppliers, questions like: What can we do differently that is costing you money? Can you explain the steps that you currently take to get your product to us? How many trips to the job are you currently making?, then acting on the answers to pursue long-term cost reductions. These negotiations strengthen both companies.
 

Lowering Cost of Ownership

Purchasing is so much more than getting three bids and choosing the lowest one or simply demanding lower prices. A good purchasing process continually prunes cost from the supply chain from your business as well as the vendor's business. They consistently reconfigure and redesign processes to remove cost eliminating the processes and even specifications that are no longer bringing either party benefit. A good supply chain professional takes the time to listen to both sides to discover areas where quality can be improved, innovation can be used and costs can truly be reduced rather than just taking a cut and run approach.
 

Adding Depth to the Purchasing Process

When speaking with a local vendor, he quietly mentioned that he would take any work at any price just to move product. Some days later when speaking to his competitor, he seemed almost aloof at the thought of supplying to a custom home builder. Instead, he boasted about all the commercial work he had gotten into. All the while, the price for the raw materials to make the product has been trending downward for months.

Relationships like this and ongoing research allows NEMAsource to see weakness in the supply chain and where the best long term supplier fit applies. By partnering with a supply chain professional, builders can reach beyond their sphere of influence and tap into otherwise unseen market conditions.
 

Consider the Possibilities

Five years ago, even two years ago, most builders were so inundated with new contracts that using the vendor from the last project was the safe bet. Any inefficiency could be covered up with higher prices and passed off to the consumer as market appreciation. Today, the landscape has completely changed and with it, the purchasing function has become a key player in driving down costs without losing focus on timeliness quality and relationship.

Now is the time to expect the maximum value from your supply chain. If you are looking to add depth to your purchasing function, NEMAsource is your best place to begin creatively lowering your cost of ownership without losing touch with your business. For more information, visit nemasource.com