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Recession-proofing your operation

by Robert B. Footlik, P.E.

Robert FootlikWith the right actions, you can emerge from the economic slowdown in a solid market position. Here are a few common sense paradigms that can go a long way to keeping your business healthy.

Prosperity can occur without growth
You don't have to expand sales to increase profitability. Improvements in operating costs have a leverage effect far better than "other people's money." At a 5 percent return, $1 in cost reduction is equal to $20 in increased sales. The lower the return, the more important cost containment becomes. When return goes negative, it may be too late to recover.

Bad customers may just be your best resource
Ever wonder how those high-risk lenders survive? They manage their accounts and charge extra to cover the risk. You can do the same. Selling COD, extending a little credit, charging an appropriate, not exorbitant, price and costing in the expense of extra services is fair. Gouging is not. Supporting a customer can build loyalty that is rewarded many times over when prosperity hits again.

You can't sell anything to your enemies
After a customer goes "belly up," the people will still be around.  Remember, the business signed the checks, but the people wrote the orders. When they move on, go after their new employer as a potential customer. Loyalty opens the door. Service and trust build the relationship.

Watch the line count
As sales dollars go down, the line count (number of lines written) may actually hold steady or rise. This occurs when your customers have diminishing sales. They begin to purchase more often, in smaller amounts. They too have a finite cost of holding inventory, and when they reduce their stock, they must rely more heavily on your merchandise.

Add a line
Add one more line to every order by encouraging all sales personnel to sell affinity items with the order. If the customer orders item A, do they also need item B to complete the job? Better yet, is there something that they might also want? Needs are price sensitive, especially in a recession. Wants are satisfied at the earliest possible time, regardless of price.

You can't sell off an empty cart

Classical distribution models say you should cut inventory going into a recession. This is normally a prelude to Chapter 11 of the Bankruptcy Code. Slow-moving items, and dead stock are usually the first to go. Unfortunately, these SKUs may actually be at the heart of your image as a service organization. Eliminating inventory at the bottom end rarely saves much in the way of dollars. Cut the quantity, not the quality, of what you offer.

Work the receiving department harder

In a recent analysis of a client with 95 percent consigned stock, we cut the operating costs by ordering more often. The cost of carrying inventory was very low; the vendors own it. But the cost of physically holding the stock was very high. By working harder in ordering and receiving, the distributor cut one-third of the rent,  reassigned one warehouseman, and stopped hiring temporary labor. Net gain: $4,000 per month. Net additional cost: $0.

You can't sell it if you can't find it

Clean up the warehouse or factory. Turn the goods faster, and reduce work-in-process in manufacturing. Add a locator system, and enforce the discipline to ensure success. Nothing creates losses faster than a warehouse search committee that comes up empty handed. Reordering materials that are in house is just plain dumb, regardless of the economy.

Slowing down means cleaning up
Reduced sales don't automatically result in cost reduction. Professor C. Northcote Parkinson's famous law - work expands to fill the time available - is just as true today as it was 2001 years ago. As business slows down, start the staff on cleaning up the operation. Otherwise, they will just sit around. Now is the time to accomplish those jobs you've put off for a rainy day.

Review the maintenance records on all equipment

When repair costs go up, it may mean it's time to replace the equipment, if only you had the cash. Leasing is a viable alternative. So is training, or retraining, the staff not to break their tools. Preventive maintenance programs are frequently early victims of an ill-conceived cost reduction program. Keep the equipment running, figure out more ways to use it effectively, and don't let anyone mistreat these assets. For example, starting customer deliveries at 5 a.m. may be more viable than you think.

Learn what is going on
Business is like a stool with three legs: sales, finance and operations. If any one leg is far longer than the others, it wobbles, or becomes unusable. Develop some indices such as lines-per-order and counter orders divided by orders delivered, to know what is going on. Spreadsheets and graphical formats can express this information in an easily understood form. Share this knowledge with the people who affect it. They need the report card.

Visit the warehouse regularly

It is easy to be so busy putting out fires that there is no time to take away matches. You make money in the office; don't lose it in the warehouse. Stay on top of the operations. Deal with problems as early as possible, not when it is too late to fix or prevent the action. People who are reluctant to bring you bad news subconsciously perpetuate the problems. By being available, you can spot problems and people can reach you before small problems become big ones.

People are your best resource

Depression can happen to an individual, a company or a country. Don't let morale slip. Adversity is an opportunity to emphasize teamwork. Get everyone pulling together in the same direction. The warehouse can push the sales staff by asking for more orders. Sales can retaliate with more work for the warehouse. Writing more orders generates competition, building confidence and morale. Breaking a long order into individual lines and entering multiple orders does not.

Compromising safety is never appropriate

Want to destroy the company? Start cutting corners in areas of safety and environmental responsibility, and the risk vs. reward equation will never be in your favor. All it takes is one incident and an aggressive lawyer to seal the fate of the company. Morally, compromises in these areas are wrong. Legally, things become very expensive, very fast. Worse yet, it gives the wrong message to your people. Risking harm to anyone is never a viable alternative.

Creativity beats hard work
There is no point in trying to fight the economic system. Fight it and you will lose. Stay flexible in your thinking, look for opportunities and use finesse instead of brute force. Any idiot can sell more by cutting price, for a short period. You can prosper by selling services, looking beyond price, meeting and exceeding market expectations and convincing the customers that you save them more money overall than the cost cutters. The bigger the competitor, the more they are hampered by corporate structure, inertia and lawyers.

Encourage others to downsize

Especially if they outsource to you. Reevaluate your mission statement. If distribution is your strong point and your competitor's weakness, acquire, combine or ally with them now. If they can sell better than you can, let them. But, make sure that they sell your products and services. Look beyond your own industry. Some office products dealers weathered the last recession by distributing asbestos abatement products.

Don't be afraid to gamble

Just make sure you stack the deck. Sell the building, and then lease it back. Leave in a clause that you can buy back the building in the future. Many companies have been kept afloat by divesting assets that they did not need or understand. If this is too radical, and the building is too large, take in a tenant. Too small? Re-engineer the layout to use the cube more effectively.

Do things once, and do them right

Poor quality and bad management have sunk more companies than any other internal factors. The only acceptable quality level is perfect. With reductions in labor, decreases in business and few extra resources available, this is not the time to squander effort on redoing work or checking and other redundant operations. Put more responsibility squarely on the shoulders of the individual doing the work, and thank them lavishly. People can, and will, respond beyond your expectations.

Technology is your friend
Simple bar coding, using personal digital assistants (PDAs), using your existing computer to translate data into real information, and taking advantage of EDI and other programs cost you next to nothing but yield big results. Start by examining the safety stock that you hold before reordering. Many operations have switched to EDI, fax or Internet ordering, while leaving safety stocks at the levels required for using the U.S. mail system. Cutting two weeks off of safety stock and ordering more often stretches the warehouse space, while reducing carrying costs.

Don't wait for someone else to bail you out
Nothing is going to happen until you make it happen. The Tooth Fairy, Santa Claus, the Easter Bunny and Regis are not going to hand you a million bucks. Those who stand around wringing their hands and tearing out their hair are going to have a lot more time on their hands - soon. Start reinventing the business. Service, creativity, efficiency, organization and real knowledge of the business will carry you through even a prolonged recession.

Robert B. Footlik is a licensed professional engineer and writes for numerous trade and professional journals. He can be reached at 847-441-5920 or You can also visit his Web site.



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