How to Thrive in a ‘Down’ Economy

By Tyler Burgess as featured in Manufacturing Today

Being left behind are the manufacturers that are just going through the motions…

Despite the public perception that the economy is in a downturn, many manufacturing operations are thriving and turning a profit. Their owners are managing “the business of the business” rather than just making widgets. Being left behind are the manufacturers that are just going through the motions, unwilling or unable to make changes to adapt to the current economic conditions and fluctuations.

First Order of Business

So, what exactly is managing the business of the business? It starts with recognizing that every business has its set of critical variables which determine success or failure. Some of these may be shared with other companies; others are unique to a specific enterprise. Successful owners have analyzed every facet of their business and know its critical variables. They can then control those variables from a top-line, bottom-line perspective to make sure they rate at the higher end of the median in comparison with competitors. Here are a few examples of critical variables involved in running a business on a daily basis:

• Profitability. Determine which customer accounts and products are profitable and which are not, and who among the sales force is generating profits and who is not.
• Price point. Identify at which point the business breaks even and begins to turn a profit. Note that establishing the price point takes into account the true cost of producing and selling a given product, which includes a whole subset of company-specific variables, ranging from the cost of transportation of raw materials to the cost of fuel in shipping finished products to customers.
• Marketing and sales. Analyze the marketability of each product and measure the effect of established sales policies and practices, promotions and advertising. What are the costs and ROI of each? A crucial, but often overlooked factor is whether sales are aligned with production. Finally, analyze how marketing and sales efforts affect the price point and the bottom line.
• Administrative variables. Maintenance, financial planning, inventory control and any other company-specific administrative variables should all be aligned with sales forecasts and production needs.
• Finances. Note whether working capital is adequate to produce the firm’s products and whether the established credit lines are sufficient to support and grow the operation. Identify the key financial ratios and keep the percentages in line with budgetary controls.
• Productivity. Think about how personnel recruitment, training and assignments can be improved. Are sufficient numbers of dependable employees at work every day? How can plant layout, workflow or scheduling be improved to reach peak efficiency?
• Material costs. Review how much the company is paying for which materials and what economic and other factors might affect their pricing in the near future. Are there alternate sources that could provide the same or higher quality at lower cost?

Once the firm’s critical variables are established, research the industry averages in each category. Know how the business stacks up against the average and the best. Then set a goal to manage all critical variables to rank in the top 10-15 percent of any given industry average. In managing the critical variables and planning accordingly, there is little room for error. Any factor that remains unmapped in any one phase of the operation (e.g., a product held up in R&D or testing, a raw material held up in transit from China) could place the company below the median for a critical variable.

Adapt to the Economy

A poor economy presents manufacturers with additional factors that need to be taken into account in the management of critical variables, such as fluctuating fuel costs and the rising prices of certain raw materials. Remember, it’s the flexible manufacturers that are thriving, while those who just go through the motions stagnate and find their profits dropping.

However, don’t just raise prices indiscriminately for every single product. First, analyze the critical variables to determine which products are the most and least profitable. A profitable course is to increase production of the best-selling items. Ensure that sales are keeping up with production and vice versa.

Appoint a leader – whether the owner, president or CFO, depending on company structure – who will be responsible for establishing processes and tracking systems necessary to monitor the critical variables. Give the individual full authority and responsibility for managing productivity and ensuring production and sales are in alignment. Don’t waste them by being unable to provide products because production has fallen behind.

Don’t Manage by Emotion

A tent manufacturer with outstanding product ideas was not flourishing because the critical variables had not been identified. Rather, the business was being run like many other family businesses – where managing people was based on emotion. Once the owner learned how to manage the business of the business, identify critical variables, minimize waste and establish accountability, the company began to generate significant sales and yield substantial profits. Every single employee, every cog in the business, covered his or her own expense and generated a certain percentage of the business’ revenue. It’s difficult to manage by emotion or hold people accountable to an emotion. It’s easy to hold them accountable to numbers.

Another example comes from a confectionary manufacturer. Upon analysis, it became evident that the firm was wasting money by keeping the same number of employees year-round. Being in the business of producing sweets, it had huge spikes around the typical holidays. In between, the dips were so dramatic that if fixed expenses were maintained year-round, the company had no chance of making money even during the spikes. Employees are a critical part of a business, but managing the business of the business is just as important to securing the employees’ longevity with the company as the welfare of any individual. Don’t let emotion dictate staffing needs, whether those needs change with the seasons or the cycles of the economy.

Do What It Takes

The media usually interprets layoffs as a sign that a company is in trouble. In reality, layoffs are quite often a positive sign. They can mean that management is not afraid to make the changes necessary to adapt to current economic conditions. Rather than hunkering down to make it through the next cycle, management is taking the business by the horns. It has identified the critical variables and is managing them aggressively to ensure the longevity of the company and the welfare of the majority of the work force.