Company Waste: Some Companies Too Slow to React to Downturns

Company Waste: Some Companies Too Slow to React to Downturns

By: David Van Rossum

Take care of the small things and the big things will take care of themselves. Ever hear that? A nice adage designed to remind us to keep an eye on detail.  A company in the midst of a downturn would do well to reverse that thinking.

                Many of us have worked for firms that have been forced to cut costs because of declining sales or sharply rising costs. Meetings are held to figure out how to eliminate waste. Forecasting the length of decline is always a problem. Ideas that percolate during these meetings are numerous. Adjust the thermostats to lower heating or cooling costs. Use less paper. Use the backside of documents for notes. Turn off lights. Maybe reduce the lighting by removing half of the bulbs. Get rid of the coffee service. Have the cleaners come in less often. Eliminate certain expenses such as paying for lunch locally when there are no outside participants. Reduce magazine and newspaper subscriptions. Cancel a holiday party. Adjust the intervals for landscaping services. All of the above could have been done long ago, but weren’t because things were good. The list grows and after the meetings we are satisfied that these changes will both save money and instill a sense of urgency in our workforce as we all share in the pain. It also signals that more drastic measures may follow, unsettling many and perhaps incenting others to pitch in with more ideas or greater productivity.

                Time passes and the decline continues. Reality hits. The company needs bigger savings. More ideas are put forth. These are the tough ones. Headcount reduction, changes in healthcare benefits, shutting down locations, terminating production commitments, pay cuts or schedule reductions, forced shutdowns. Numbers are run. Reality sets in. Time passes. The firm waits another month just in case business picks up due to price changes or specials that are implemented.  When they don’t work, they decide that they have to pull the trigger on these draconian measures. Lists are formulated as to who goes and who stays. This gets hashed out over time. Then the decision is made. The company will implement these measures in two weeks. This gives them time to craft separation agreements and consult with labor attorneys. It gives them time to negotiate with suppliers. Secrecy is paramount, but everyone knows. The need for resources is debated and adjustments may be made. The plan finally goes into action. The survivors take a big breath and acknowledge the hardship of maintaining the operation with reduced resources. Executives congratulate each other for making the tough decisions. Valuable employees cast an eye toward other opportunities as people tell each other that they are “lucky to even have a job.” The message is sent out from the CEO that the regrettable actions are necessary but if everyone pulls their oars the company will rebound and grow to be bigger and better in the future. The C levels drive their company cars home and worry. The cuts are two months too late.  Sound familiar?

                When a company is forced to significantly reduce costs, they are almost always too slow to respond. Should they implement small savings programs such as those described in the first paragraph? Of course. Should they be implemented before attacking the larger issues? No. When the demand for goods or services decline, or the market isn’t able to absorb price increases for products that have been rocked with higher costs, it is generally due to one of two basic issues. The products or services are not a necessity, or the competition has built a better mousetrap. If your output isn’t a necessity to your customers, you better have a plan to implement before the decline starts. Staying ahead or current with competition should be built into your corporate culture. That is a subject for another day. When profits erode, place an emphasis on taking care of the big things first.

                 

                When profit declines or decline is predictably imminent for a company, management should look to protect the investment of the shareholders as aggressively as possible. Financial service companies have detailed disaster recovery plans. Most companies have succession plans. All organizations should have a plan to deal swiftly with a downturn. For example, supply chain management should have a ready list of the costs of slowing down or cancelling vendor commitments.  All managers should have a reduction plan including headcount, facilities or other resources and their consequences. Executives should have an idea of possible partnering arrangements with friends and competitors alike. These arrangements could include sharing shipping containers, rebranding excess inventories, sharing back office support, and possible business combinations including merger or acquisition. The finance department should be well versed on debt covenants. These are all big ticket items that need already be identified when the decline begins. Your company probably has some unique costs. Most companies don’t have these possible actions outlined and updated. Some do, but probably because they had to go through a cost reduction recently and they are now faced with further cuts. It would be dangerous to act on many of these ideas prematurely.  It could be devastating to suddenly be unable to meet demand if the downturn was merely a blip. If, however, you are in a meeting that discusses getting rid of a coffee service or reducing office cleaning intervals, trust me, you better have large cost saving plans available and ready to be enacted.

                If your company is beginning to struggle or is in the midst of a downturn, chances are so are its customers. Those customers will be looking to roll back deliveries or slow down payment for your products. They will probably look to negotiate changes in their buying commitments. Your company better be attempting to do the same with their suppliers. Reducing headcount is a very hard thing to come to terms with. Keep in mind that it is much easier to recall laid-off workers if business picks up then recover the capital spent for an unnecessarily large workforce.

                My message is simple: Be prepared to reduce your large costs when a down turn forces you to turn down the thermometer!