IN DEPTH: ECONOMIC DEVELOPMENT
From the October 26, 2001 print edition
Guest Column
By J. Tim Pruban
Recent disastrous events have fueled uncertainty in the business world and increased pressure on an economy that already faced a slowdown. All companies must find ways to function. How can they best press on?
Just a few years ago, when the economic outlook showed an upward trend, spending was wise -- even if the returns were unclear. But in a potentially declining or uncertain economic climate, cash is king, and management's efforts must focus on maintaining cash flow.
Sometimes, the solution is obvious, but management lacks sufficient distance from the situation to see it. The key to managing through an economic downturn is to find ways to maintain and even increase cash flow.
The following steps can be applied today to help mitigate uncertainty and provide a good buttress against potential economic declines:
Re-examine cost structure.
Will your current cost structure support the new and probably lower level of sales? Is every operation balanced so that staffing meets capacity?
Believe it or not, some companies still sell products with negative margins. A cost review can determine if management is attached to a product that isn't performing. If so, jettison the product immediately.
Re-examine processes, focusing on areas associated with heavy investment, large staff or large inventory.
By charting work flow, including office processes and plant flow, companies should answer the question, "Is there a better way to accomplish the objective?" More often than not, there is. Sometimes the solution to a problem might seem obvious in retrospect. Such was the case with a water-heater manufacturer that reduced trucking costs by $2.2 million. The company slashed both tractor and trailer fleets by half. It began scheduling customer deliveries for improved cost and time efficiency. Routes based on more advantageous back-haul locations were established, and company trucks were used for inbound deliveries.
The solutions were simple, but at first, management lacked the distance to see them.
Confirm that throughput or operational flow is maximized.
Identify bottlenecks in each operation and measure the cash contribution through the bottleneck. Are there ways to optimize the contribution?
A pipe bender and welder eliminated completely a bottleneck so significant that it was the source of increased overall costs. Analysis indicated the bottleneck resulted from both the paint booth equipment mix and its configuration.
Related to that was a "make or buy" decision: A third party was hired to cut, bend and paint the highest cost items, reducing costs by 20 percent over internal costs to produce the same item.
Eliminate the "dogs," products or projects that aren't contributing.
When the economy is in a decline, avoid heavy investment in speculative projects. Management needs to take a dispassionate view. If a project doesn't show promise, eliminate it immediately.
Identify new markets for existing products.
Developing new applications for existing products can often boost revenue without the heavy investment required by an entirely new product. Challenge the sales force to list three to five new customers each week, and require they track sales calls and sales from new customers.
A large distributor client of ours did this and saw a 10-percent increase in sales within the first three months.
Another distributor, facing declining sales from his current customer base, began to look at new channels. In doing so, he also has avoided the risk of competing directly with his current customer base.
Take the time to communicate with employees, especially during troubled times.
Not talking about layoffs or the potential for them can cause morale and productivity to fall. Be as honest as possible. Don't be afraid to acknowledge that cutbacks will occur, but promise to keep people as informed. The rumor mill is always active, but it is especially active during times of great uncertainty. Don't let employees hear about layoffs through the grapevine or a news release. Make sure to communicate clearly that the company's goal is to improve cash flow. Tell them how the company is doing with respect to that goal.
Obviously, you can't disclose everything to everyone. But periodically updating all employees, either through "all hands meetings" or in writing, can prevent sagging morale or productivity declines.
Managing through an economic downturn takes different skills.
One client created a sporting goods business out of his garage. Everyone grew into the business with him, and the company had no formal operational procedures. One manufacturing employee made 200 units, another made 50. Same job, different employee. He began losing money when the economy went south. Our client is a highly effective entrepreneur, but he had no idea what his real market demand was, how many units he needed to produce, how much lead time was required and, most important, he had no idea what it cost to produce a unit. His financial and operations executives were equally weak.
The answer: hiring a seasoned operations professional, installing production standards and benchmarking to allow the company to manage manufacturing as a true production facility, and budgeting and forecasting to help the company squeeze every dollar it could out of the business. Also: a loan structure that matched his company's cyclical need for cash.
Manage with certainty.
The bottom line for managing effectively during uncertain times is simple:
- Management must balance looking inward for ways to lower the break-even with looking outward for new market opportunities. Both are essential activities during tough times.
- It's necessary to be more critical of projects that aren't generating a return. In an economic dowturn, you may not have time to wait for them to mature.
- Establish and maintain a culture that rewards profit and cash flow -- regardless of what happens to growth. That reinforces activities that can return the company to a position of strength.
- Some skills are universal. Recognize what the situation is, plan for the future and for the unexpected and then implement the plan. To survive a downturn, management must lead decisively, recognizing that sometimes leadership means telling people what they don't want to hear.
Remember: Troubled times don't last forever. Successful navigation through the down times makes companies leaner, tougher and better prepared to exploit opportunities when the tide turns. And it will.
J. Tim Pruban is the President of Focus Management Group, headquartered in Tampa, FL. He can be reached at (813) 281-0062 or via e-mail at t.pruban@focusmg.com.
Copyright 2001 American City Business Journals Inc.