Bruce E. Jacobs03.31.09
Best Practices: Managing Through an Economic Downturn
Bruce E. Jacobs
First, don’t panic; second, serve your customers better than ever; third, conserve cash; fourth, control costs; and fifth, keep a longer-term view of your customers’ future needs, but at the same time aggressively manage the short-term financial performance of the company. Sounds easy.
What’s the Plan?
Every medical device and equipment manufacturer is capable of defining its destiny in good and poor economic times. A deep economic downturn is not the time for executives to be complacent and hope that their companies don’t lose. It is a time for executives to be aggressive, make serious changes to their business models and capitalize on the chaos and opportunities in the market while getting their companies’ financial houses in order.
Many executives may be questioning the survival of their companies, but an aggressive attitude and quick adjustments to respond as needed in a dynamic envir-onment will make surviving more achievable and will provide greater opportunity as the downturn eases. In most instances, when a company begins to suffer severe financial underperformance and struggles to survive in an economic downturn, the primary reason is management hasn’t done what it knows it needs to do. Today, there are many executives managing companies that have never led companies through a deep economic downturn as experienced in 1990-1992, 1980-1983 and 1972-1976.
Few companies can survive a deep economic downturn simply by hoping they won’t lose. If your company doesn’t prepare a business plan, there is no better time to assemble your management team and develop a survival and recovery plan. If your company regularly prepares a business plan, now is the time to re-evaluate the plan and make necessary adjustments. Now is the time for executives to lead and execute the plan to get through the downturn, rigorously monitor performance and quickly respond to changes.
Do not confuse the annual operating budget with a business plan. The budget is nothing more than expected financial results, revenue and costs that should be achieved by executing the business plan. If there is no business plan, the budget is only a good intention and demonstrates management’s lack of leadership, vision and direction. When the company is financially under-performing, it’s not because the budget is wrong, it is because the plan hasn’t been executed or modified to meet the changing dynamics of the business climate.
Focus on your customers, and improve your service and performance. Every point below 100 percent of order fill rate represents lost revenue opportunity, and in an economic downturn, lost revenue resulting from less than a 100 percent fill rate while having large inventories is just bad business. The ramifications are smaller orders (through no fault of the customer), higher costs to fill orders as back orders or cancellations occur, and agitated customers through poor order fulfillment performance, not to mention the lost opportunity to sell inventory.
In every downturn, cash is king, and the conservation of cash and the conversion of assets to cash are critical success factors. Rigorous management of cash is necessary, and a rolling 12-month cash flow plan should be developed and implemented.
Customers’ receivables and their agings should be monitored and tightly managed. Inventories must be reduced and converted to cash, especially excess inventory levels and obsolete inventory items. Work with customers and suppliers to improve pay-ment terms, resolve or eliminate invoice hold-backs, and extend your payment terms and improve discounts and pricing allowances. Work with your lenders to improve the terms and structure of your debt, improve your interest rate and increase your credit limit. Lending instit-utions are much more selective of their customers in a downturn. If your company is solvent, has a solid business plan, cash management and solid balance sheet, your lending institution is more likely to roll over existing debt for their current customers.
Every cost item on the general ledger is a candidate for evaluation and improve-ment. Good suppliers look more favorably on their good customers and are more eager to work with their good customers to keep their business. Lower pricing, discounts and terms are negotiable opportunities that can be achieved but will not be offered if you don’t ask. Just as your company is being pressured by your customers for lower pricing, better terms, discounts and special services, don’t feel guilty about sharing the pain with your suppliers. The intent is to improve every cost item by reducing the cost or achieving more value for the same cost. Remember, least total cost provides greater value than cheap.
Aggressive control of costs is integral to a solid downturn plan with good manage-ment processes.
Costs must be kept in line with the revenue base, and adjustments must be made regularly to offset cost increases that cannot be controlled. Now is a good time to re-assess your product line and eliminate under-performing products, which are great sources of cost improvement.
Finally, don’t take your eye off the longer-term future needs of your customers. Align your business operations to deliver on the short-term performance while building for the longer term.
In every downturn, the best measurement of management’s capa-bilities is how well the company performs in an economic down-turn, not how well the company performs in a good economy.
The business plan is a vital management tool used to set the course the company will take during the downturn, and it defines the actions to execute the plan’s desired results. If the planning process is not already incorporated into the businesses’ management processes, an economic downturn is a good time to make business planning an integral part of the management process. Every employee should know what the business plan is and how the company will get through the economic downturn. He or she should know the action plan
of the company, as well as the expectations the company has of them, how management will execute the plan and achieve results, closely monitor performance and adjust the plan and actions accordingly to meet the changing environment.
Where to Focus
A deep economic downturn is no time to maintain the status quo. It is a time for management to change its mindset, and if required, the company’s business model
of operations.
Managing Through an Economic Downturn
Markets are uncertain, customers are not buying the volume they used to, and available funding is scarce. Tighten down your balance sheet, unload excess assets, close underperforming business segments and eliminate marginal products. A downturn may not be the best time to clean up the balance sheet, but if you don’t, the situation could get worse.
Focus on serving and satisfying your best customers better than ever before. These are the customers you want to maintain and have in place when the economy improves.
The revenue stream is getting smaller in your market, and under-performing competitors will be getting weaker, resulting in lower performance with their customers. Improving performance with your best customers will protect your revenue base and strengthen your position when the turnaround occurs.
An overlooked area of opportunity to improve service with customers and to generate needed revenue is how well you fill your customer’s orders. Too many manufacturers and distributors are not able to bring their inventories in line when the downturn occurs and fail to fill the customer’s order at 100 percent.
In fact, the customer order fill rate for many manufacturers and distributors declines to an unacceptable level for the customer, even with higher inventory levels of product to sell.
There are winners and losers in a downturn. Develop an acute awareness of your industry’s opportunities and where you can seize those opportunities. Take aggressive actions to solicit new customers during a time when competitors are reducing their service and lowering their performance with customers. Make sure your competitors don’t acquire your customers.
Managing through a deep economic downturn can be achieved successfully with rigorous involvement and short interval management of the company’s operating and financial performance.
Planning must be put in place, but execution, monitoring and adjustment of the plan and actions must be performed to achieve the desired results. Continue to build for the longer-term growth but aggressively manage for the short-term.