SURVIVING AN ECONOMIC DOWNTURN
How Lean Can Help: Some ideas and tactics that will keep your business intact, move you beyond fighting fires, and fully prepare you to capitalize when the recovery comes.
By David Dixon
There are two solutions to diminishing profit: (1) Increase efforts and expenditures on sales and promotion. (2) Reduce costs through small lean improvements that can be supported with nominal expenditures.
Because many of us face a declining economic environment as this New Year begins, let's explore some lean ideas and tactics that will aid in surviving the downturn intact and being prepared to capitalize fully on the recovery that is sure to follow.
We certainly do not want to add to a negative mindset that becomes a self-fulfilling prophecy of economic doom. Instead, we agree with famed investor Warren Buffett, who continues to express his full confidence in the fundamental soundness and resiliency of the U.S. economy by buying stock in American companies. As such, our thoughts here reflect a set of short-term measures that will ensure our survival and position us for a brighter future.
I am indebted to my friend and colleague Dave Scott for many of the following ideas being discussed. As the former vice president of operations for Equipto Corporation and a long-time associate of our firm, Dave has managed through more than one downturn and brings a valuable perspective to this topic.
HEED THE CALL
By whatever definition, it appears the U.S. economy will slow dramatically in the months to come. To most small shops, this equates to a simple reduction in demand and revenue. In this situation, it is vitally important that we (1) heed the early warnings related to our industry so we have the maximum amount of reaction time, and (2) be brutally honest with ourselves about the downside potential and impact on the business.
What is the worst case? And equally important, what is the best case? Only after we quantify these two scenarios are we actually prepared to lay out contingency plans that will see us through.
FEET ON THE STREET
How ironic that so many companies begin cost cutting with an assault on the sales force, completely forgetting there are two solutions to the problem of diminishing profit. One, of course, is to reduce cost. The other is to minimize the loss of revenue.
If anything, this is the time to "get out of the bunker" - increase our effort and expenditures on sales and promotion, and assign as many qualified people as possible to talk to and meet with customers and prospective customers. The name of the game is "feet on the street." The owner/CEO and other key people can be particularly important in this initiative. At the same time, we want to redouble promotional activities, especially communications to potential new accounts.
As always, however, our best opportunities for additional business are often with existing customers. Now, more than ever, we want to be a hero to every customer. This means being dependable: getting quotes out on time, delivering product on time every time, and assuring perfect quality. Sound familiar? These goals are completely consistent with those we pursue through a Lean/continuous improvement program. If you have a Lean initiative in place, focus or re-focus on the needs of your customers as they navigate the same economic hardships that you face. If you have not begun to employ Lean principles, now is the time.
With respect to your Lean capabilities, promote them heavily. Point out to customers or prospects those ways in which you can tie in to their Lean efforts through custom kitting, containerization, Kanban systems, dock-to-line deliveries, vendor managed inventories and other programs.
Another important approach to minimizing a revenue decline is to "expand the pond" by offering new products or services to your existing customers, or sell existing products and services to new customers/markets. This requires flexible and creative thinking and a willingness to grasp new opportunities. Areas of new business that were of little interest when we were operating at or near capacity may now be a key to propping up sales in the short-term and fueling our longer-term growth.
MORE WITH LESS
Productivity is defined as output per unit of input. Improved productivity, in simple terms, is doing more with less. The philosophy, principles and tools of Lean all specifically aim at this goal. Clearly, there is never a greater need for Lean than during a time of economic stress. Yet there may be an inclination to pare back or cut the recourses applied to Lean projects during a downturn.
While some Lean projects (e.g., major plant rearrangements) are capital intensive and may have to wait, hundreds of other small improvements can be supported with nominal expenditures. This level of Lean implementation should not be interrupted. Also, be certain that Lean principals apply to both the shop and the office. White collar productivity must also improve. Above all, keep your Lean initiative alive!
With a firm commitment to shoring up sales and revenue and driving productivity improvement throughout the company, we may still have to reduce the break-even point for the business. This involves a careful look at all of our fixed and semi-variable costs.
Fixed costs often are actually fixed. There may be little we can do to reduce or eliminate them. Nevertheless, each line item should be scrutinized for opportunities to reduce the outflow of cash. Can some salary costs be deferred? Can we vacate some rented space? Can our debt be restructured to reduce the payments in the near term? What could be done to reduce or defer the cost of employee benefits?
Similarly, all semi-variable costs must be evaluated. Review all discretionary expenses, cut overtime except where absolutely required to satisfy customers. Try to cover the overtime requirement by diverting personnel instead. Look at travel; can we accomplish the same thing with video or teleconferencing? Maybe we can defer fixed asset (capital) expenses until the next quarter or next year.
Say no to all capital projects and see who returns with solid economic justification in support of their specific project. These are typically the ones that are worth considering.
Finally, depending on the success of our other efforts, we may have to consider a reduction in the workforce. This is too often the first thing that is done; it should be last. If we have heeded the early warnings and been aggressive in driving sales and productivity early on, we may be able to avoid a layoff. However, if sales fall to a point where the workforce cannot be utilized at a reasonable level, we must take this action.
If we have the prerogative, we obviously want to first dismiss those employees with a history of performance issues. We want to make sure we have the right people on the bus and in the right seats. If necessary, get the wrong people off the bus. A reduction in force engenders a great deal of angst in the workforce. We may lose some key employees if we fail to communicate clearly and often about the state of the business, our basic intent and our plans for keeping the business afloat.
With respect to managing cash, focus primarily on collections. Controlling costs and expenses reduces your cost and conserves the need for cash. Now we must diligently manage the collections process. Call customers/clients just before the due date to inquire if payment is on schedule. If the payment date passes by, follow-up to see when you can expect payment. Identify doubtful accounts early and use aggressive tactics to collect. You may need to "beef up" this effort by temporarily assigning someone from an unrelated area to assist in the collection efforts. Maintaining your cash position is critical to survival during troubled times.
Even when cash is short and the short-term prospects are a bit gloomy, investing in the future is important. Some investments are needed to maintain momentum, to ensure that the company continues to move in the desired direction.
Maintaining a Lean initiative is one very important example. Others may include new product or process development programs, training, supplier development, and marketing efforts. Remember the inevitable upturn - we want to be in the best possible position when it comes.
Successfully guiding a company through an economic crisis (without a government bail-out) is among the greatest challenges facing any business leader. It demands the highest level of commitment to customers and other stakeholders in the business.
When times are difficult, it is not enough to simply fight fires. Use the tactics described above . . . plan for better times ahead. Managing in difficult times is the real test. Are you up to the task?
David Dixon is the executive vice president of Technical Change Associates and a registered professional engineer with more than 35 years of experience in lean manufacturing, Six Sigma and other improvement initiatives. For more information, visit www.technicalchange.com or call 480.814.1152.