Six steps manufacturing companies should consider in the downturn

The current economic climate has significantly affected the manufacturing sector.
RSM McGladrey
2009/01/16
The building material and transportation industry segments were the first to slow starting in late 2006. As consumers started pulling back spending, the deterioration in those two segments continued and started to impact other segments in the first part of 2008. The situation was further exacerbated by the financial crisis that started unfolding in late summer of 2008. A recession is upon us and the general consensus of economists is improvement won’t start until the third quarter of 2009.
What can your company do to sustain during this economic downturn? Taking the appropriate steps now can minimize the impact of the recession on your business. Focusing on the following six areas can help you continue to grow your business and weather these tough economic times.
1. Update Strategic Plan
Asking four questions can help a business effectively look at their strategy: What is our marketplace potential? What infrastructure investments do we need to make to reach our potential? How will we look from a financial perspective? And how do we remain innovative?
Although a management-driven approach can be effective, incorporating company leaders in the strategic planning process and using a balanced scorecard framework to guide the planning process helps everyone stay on track. A scorecard can help encourage and gauge customer, infrastructure, innovation and financial target performance.
2. Review Sales and Marketing Efforts
Understand your market and implement “actionable” segmentation based on buying behaviors. Consider using the 80/20 rule – 80% of your revenues are coming from 20% of your customers. Track customer activity and score them based on margins and payment performance to determine which accounts are the worst performing and worth exiting. By analyzing your customers pricing and margins, you can implement action plans that deepen key relationships – resulting in more profits for your company.
3. Focus on People
Employee retention is critical during an economic downturn. Companies need to ensure that their compensation and benefits programs are competitive to retain employees, with an emphasis on rewarding top performers. It is increasingly important for companies to have recruitment and reward plans in place to attract and motivate critical talent — and maximize the return on a company’s human capital investment.
Research shows that wage and affordability issues can be a huge distraction and stressor in the workplace. To entice skilled workers, it’s important for employers to offer competitive wages and benefits. Turnover can easily cost a company 150 percent or more of an employee’s annual compensation.
4. Review Operations
Now is a good time to examine functional areas of operations and scrutinize how well your processes are working. By benchmarking operational efficiencies against your peers, you can learn about best practices that can improve your company’s bottom line and identify areas in your operational structure that are not as efficient as they could be.
As you review your operations, focus on these key areas:
Implement lean manufacturing techniques
Use technology to improve back office processes
Determine appropriate inventory levels
Reconsider sourcing alternatives both global and domestic
Improve supply chain information for timeliness, accuracy and relevancy
Update product costing to reflect current business conditions
5. Review Financing
In today’s tight economy, it is important to meet with banks and/or financiers on a regular basis. Make sure you know who has final authority for your credit decision, and meet with that person. Being proactive about reporting any potential cash flow issues can strengthen a company’s relationship with its lender and make it easier to get an amendment or waiver if a covenant violation occurs.
6. Establish Cash Flow Management
Cash is the lifeblood of every company and should be focused on everyday. Understanding your cash flow is critical – where cash is generated and where it is going. The cash cycle begins when an item is ordered from a supplier, and is completed once payment is received from the customer. Identify the timing of each element of the cycle — how long it takes to pay invoices and collect revenues, etc. and then develop a cash flow plan. Doing so will allow you to be proactive and influence the timing of both receipts and disbursements.
An easy step to improving cash collections and reducing the length of the cash cycle is to avoid waiting until after a payment is considered late in your aging reports before you call your customer. Call them well before the payment is due to make sure they received the product, the quality met specifications and they received the invoice. This avoids wasted time and keeps the invoice at the head of the customer’s payment process.