Manufacturing Today

Strategic Survival

In this recession, focus on growth.

By Gregg Steinberg

“We are facing a global financial crisis which is probably the first truly global financial crisis of the modern world,” said Gordon Brown, prime minister of the United Kingdom, at a summit of world leaders in 2008. The world’s economies are more interconnected than ever before in history.

As a result, the U.S. economic downturn has left American manufacturers with nowhere to hide as markets, both domestic and foreign, dry up. The swiftness and the severity of the recession, as well as the lack of credit, have made many manufacturers struggle to survive. However, now is not the time for fear. This recession represents a unique opportunity for businesses to outpace any competitors who choose to turn tail and run.

The current downturn is unique because more than ever before, manufacturing is being impacted by other industries. This recession is not limited to any one sector, region or even country. It’s a global downturn stretching across all sectors of the economy. The lack of credit is also playing a pivotal and unique role in several ways. It limits inventories of supplies and raw materials, which makes it harder for manufacturers to get the inputs they need in a timely manner. Also, manufacturers can’t borrow money to replace or upgrade equipment, further slowing turnaround and reducing efficiency.

Normally, manufacturers who face a difficult domestic climate might seek out new markets either domestically or overseas. However, the money they would borrow to finance these initiatives isn’t flowing from the banks right now. Even if it were, this is a global event. Overseas markets are proving just as infertile as domestic ones, in part because consumers can’t borrow capital to pay for the manufactured goods. Then businesses are forced to downsize their labor, further limiting the consumers’ purchasing power.

This may seem like a vicious, downward spiral, and it is, unless the end user of the manufactured product is a government, which has avenues to print money and can raise funds that simply aren’t available to the typical small business. It comes down to the consumer being willing and able to purchase the products of industry. The reality is: this recession, in many ways, is a crisis of confidence. Consumers need the confidence that they can borrow money and have sufficient income in the future to pay the money back. Until consumers regain that, the downward spiral becomes a self-fulfilling prophecy of consumer spending cuts and layoffs.

Knee-jerk reactions

This recession has hit manufacturers like a tsunami rather than a slowly rising flood. The rapid onset of the recession and the depths to which it has damaged the economy have caught manufacturers off guard and thrown them into unfamiliar territory. Manufacturers are used to following industry trends, not consumer trends. Usually, they can track trends far enough in advance to plan for downturns, but this recession is fast, global and consumer- driven, which is hard to manage in the short-term. As a result, manufacturers are forced into reactive positions. They’re focused on their balance sheets instead of trying to grow their business and taking advantage of the recession’s opportunities.

Strategies for success

Fortunately, there are proactive strategies that manufacturers can take to get ahead of this recession and stop reacting. These include:

Know your business - It’s easy to be hands-off when times are good and revenues are strong. But in this recession, owners must know every aspect of their business so they can wring as much water from the sponge as possible.

Employ dashboards - Manufacturers can’t run their business without gauges that measure progress. Work with the CFO, controller and managers to get daily status reports. This input provides the hard facts on everything from what’s happening on the floor to inventories, labor needs, sales calls and orders.

Maximize efficiency - This includes a focus on each production line, each process and each employee. Finding ways to do more with less should be the company mantra, and employees can be incentivized to find ways to do their jobs better.

Reduce waste - Better yet, recycle it. It may sound simplistic, but having receiving pass their boxes onto the shipping department can save a lot over time.

Look at all overhead - What are the real fixed costs required to run the business? Can you save by moving into a smaller or more efficient space, or save on utilities by consolidating accounts and increasing your purchasing power?

Look for new markets - Think beyond your traditional customer, whether overseas or domestic. Who else could use your product, but doesn’t know it yet? Also what else can your equipment make that your existing customers need?

Utilize technology - Can an energy management system reduce electric bills, or can telecommuting reduce the need for offices? Remember, you may not need new technologies. Rather you may need to maximize your existing technologies. Have you truly maximized that ‘must have’ system you bought last year, or could it be doing more for you?

Watch competitors and look for opportunities - Again when times are good, there is plenty of room for everyone at the trough. Now, when competitors shy away from the marketplace, move in. Better yet, watch your aggressive competitors and see what innovations they bring to the marketplace.

Know your cash needs - Don’t get caught flat-footed when it comes to the cash needed to operate daily. Work with your CFO or controller to create a cash management system. Don’t just guess.

Evaluate your pricing - Having the right price now, when times are tough, can help you keep loyal customers when things improve.

Look for innovative financing - Consider options for the company and its customers. Can you lease instead of buy? Can your customers lease from you?

Identify partnerships - Synergy is not just a buzz word.

The role of government

Whether it’s the right course of action or not, the federal government is going to take a leading role in the economy over the next few years. Smart manufacturers will leave politics to the cable TV pundits and see this second tsunami of taxpayer money as the opportunity it is. While every sector of the economy should benefit from these funds, even if it’s indirectly, certain sectors will benefit more than others. These include industries dealing in:

• Green energy: solar, wind, biomass, clean coal and even nuclear;
• Green building materials;
• Energy storage, especially high-capacity, rapid-recharge battery technologies;
• Health care; and
• Infrastructure, such as earth moving, pave, concrete, steel and other basics.

Some will be better positioned to take advantage of the Obama stimulus. However, if your business can adapt, it can benefit too. Position your firm as the best of its kind in the territory.

Key indicators

How will manufacturers know when the recession is lessening? There are several key economic indicators to which manufacturers should pay special attention.

• The consumer confidence index (CCI) - The U.S. CCI hit a record low of 38 in December 2008 after being above 100 for much of the past 10 years. When the CCI goes up, consumers may be ready to spend again.
• GDP - Gross domestic product dropped by its target amount since the Reagan era in the fourth quarter of 2008.
• Credit availability - A vast amount of money has been pumped into U.S. banks by the Federal Reserve. Until that money reaches manufacturers and consumers, all it is doing is padding the balance sheets of banks who don’t know what losses they may be facing down the road.
• Import/export balance - China is the world’s factory. A rise in imports form China indicates increasing consumer spending, which speaks to consumer confidence and credit availability.
• Interest rates - The federal funds rate is the interest rate that banks charge each other. If the federal funds rate increases, it is a sign the economy is beginning to heat up, and the Federal Reserve is seeking to reduce liquidity and ultimately head off inflation.

The heart of capitalism

Competition is at the very heart of capitalism. Not only does competition put food on the table, it spurs creativity, fosters ingenuity, reduces costs, increases output and ultimately benefits the consumer. While this recession will no doubt produce new rules for global capitalism, the fundamental rule of competition in the marketplace won’t change.

If panic and fear lead others in the industry to think otherwise, then your company has a golden opportunity to increase its market share.