For manufacturers, every economic downturn feels unique. The 1930s were marked by overcapacity, partially the result of aggressive factory investments and productivity improvements made during and after World War I. Manufacturers were buried in a vast inventory of unwanted products. With cash having dried up and disappeared after the banking system collapse, there was no easy route to recovery; it took until 1932 for the U.S. unemployment rate to reach its peak of 25 percent. In the late 1970s and early 1980s, stagflation and the recession that followed represented their own form of virulent uncertainty. The current crisis combines bursting bubbles in real estate, commodities, and the stock market — all in a toxic stew that is rapidly reducing consumer demand, freezing the credit that is necessary for manufacturers to restructure, and provoking massive layoffs. This could spiral into its own long, drawn-out deflation, just as the Great Depression did — or it could take another turn entirely.
Yet when one looks at the manufacturers who survived and positioned themselves well in past downturns, the most effective approaches were similar. Here are several time-tested survival strategies for manufacturers that could provide a bridge over short-term troubles and simultaneously build long-term competitive advantage.
• Look beyond the crisis. The most important part of a downturn strategy is to examine your current and future company and industry position, and your product mix in light of that position. Can you come out of this as the low-cost producer with advantages of scale? Which competitors, customers, or suppliers might fail, and what does this imply for where to expand or contract product lines? Investigate where you can cancel or delay product and manufacturing investments, versus where you need to play more aggressively to win. It will be impossible to know how to take some of the other necessary steps if you do not know where you can win.
• Improve your product mix and profitability. With reduced demand in many areas, some products that were profitable just became money-losers. Nonstrategic customers or those that have de-sourced you may be targets for hefty price increases during the transition. Conversely, if you have a market advantage, outpace your competitors by selling upgraded products at a slightly lower price than you would normally consider. This may also be the time to rationalize product lines and take out items that are complex to produce, especially if customers will no longer pay for them. Remember that complexity is often a driver of overhead costs.
• Free up cash. Cash costs have gone up dramatically. Postpone nonessential investments and cancel projects that are no longer viable. Adjust capacity and inventory levels for decreased demand, moving rapidly to analytical targets based on the newer, much lower, consumer demand. Ensure that accounts payable and receivable are in line with your industry’s norms; track changes in customer credit. Consider making changes to employee pay schedules. Retailers and other business customers will most likely be willing to pay more for faster cycle times because their demand is also uncertain.
• Rationalize overhead costs. Match so-called fixed staffing needs to new workloads. For plants that have shrunk in size, combine senior-level job functions like plant management, HR, finance, and engineering across plants. Aggressively reduce materials handling, quality, and maintenance activity while retaining the most skilled maintenance people. The greatest gains can be achieved by reducing the number of layers between the CEO and the factory floor.
• Reduce capacity. This is one of the most difficult levers to pull, but it is essential for conserving cash. Eliminate shifts where slow sales have severely cut into production. In-source production to fill unused capacity. Consider combining some plants with those of competitors. But keep an eye on the most likely places for post-downturn demand; make sure that you retain productive factories there, prepared to fill the void left by competitors who will have exited the market or slashed production.
• Improve productivity for direct and indirect labor. Cross-train factory staff for increased flexibility in response to fluctuating demand. Use overtime and weekend schedules to substitute for unneeded full shifts.
• Reduce wages, benefits, and raw materials costs. Previous run-ups in labor costs may not have been justified, and many would rather keep their jobs at a lower wage than lose them. Remember the need for tremendous leadership as you embark on this path. Also, commodity prices are lower, which offers an opportunity to examine cost models and possibly rejigger raw material purchasing strategies. Renegotiate long-term contracts, readjust hedges, and switch to lower-cost materials that do not compromise product value.
All these critical measures involve judgment calls. They cannot be applied across the board. Some situations may call for cutting back some inventory but maintaining or improving service levels for the most profitable customers, or outsourcing in some areas and bringing operations in-house elsewhere. In each case, rapidly assess your situation, diagnose your problem, and then adopt a more frugal, adaptive, and resilient position — from which you can start planning for the upswing.
Conrad Winkler, a partner with Booz & Company based in Chicago, is an expert in manufacturing strategy, manufacturing transformation, and supply chain management. He is coauthor of Make or Break: How Manufacturers Can Leap from Decline to Revitalization (McGraw-Hill, 2008).
Kaj Grichnik is a partner in Booz & Company’s Munich office and coauthor of Make or Break. His manufacturing expertise has focused on the pharmaceutical, food, automotive, and aerospace industries.
Arvind Kaushal, a Booz & Company principal based in Chicago, is an expert in manufacturing strategy and competitive cost assessment. He focuses on the automotive, industrial, and building products industries.