Deloitte's Tim Hanley, John Dixon and David Brainer discuss strategies for reshaping manufacturing companies and preparing for the upturn.
Most companies are facing big challenges these days. A few encouraging signs are developing, but with markets still volatile, companies must be thoughtful in how they prepare for the upturn.
In a recent Deloitte Webcast, more than 800 participants from the world of manufacturing were asked when they anticipated the economy to rebound. Most expect a rebound sometime in 2010. However, even companies that can see the light at the end of the tunnel know that their current business models won’t likely survive much more stress. Plus, the world will likely be different when we emerge from the downturn. Companies that don’t rethink how they do business now are likely to face competitive headwinds as growth returns. Transforming the business no longer appears optional.
Transformation is challenging enough in good times. But in bad times it’s even tougher, because there are so many hard choices to consider and resources are limited. Here are three fundamental strategies to consider for navigating continued market volatility – and positioning the business for new market realities.
In manufacturing, most expect challenges until as late as the 2nd half of 2010.
When do you anticipate a rebound in the economy?
1. Secure the business
A good economic crisis acts as a stress test for the business. As you would expect, manufacturers aren’t standing still. Many have been making some of the right moves to secure their business. Our recent survey shows that customer retention and working capital management top the list of priorities. But at the same time, vendor and supply chain risk have received only limited attention. We believe this is a mistake. Companies that aren’t paying close attention to their supply chain and supply base could be in for a nasty surprise as the economy continues to languish, increasing the pressure on the entire business ecosystem.
New challenges, new priorities
Which of the following areas represents the highest priority in your organization for securing the business?
Consider taking these actions if you haven’t already secured the business:
- Conduct a Risk Assessment. Identify areas of supplier and customer risk and prioritize them based on value and importance to your long-term business success. Understand critical challenges and monitor as the environment changes.
- Have a Plan B. What happens if a major supplier goes under in the next few months? Make sure you have “life lines” in place in case a critical link in the supply chain snaps.
- Improve Transparency. Take steps to improve the visibility and transparency of customer and vendor performance. Strengthen communications and information sharing to better manage demand, supply and cash flow.
1. Target structural costs
Our research indicates that when it comes to cost reduction, companies have responded quickly. But as the downturn lingers, the law of diminishing returns takes hold – there are only so many places to cut within the existing cost structure. As companies continue to grapple with margin pressure, with costs holding firm and revenue at lower levels, they’ll have to expand their focus beyond incremental cost reduction and cuts to G&A expenses. The fundamental business model must be restructured to reset the cost baseline and improve margin performance.
Where’s the focus?
In what area is the management team focusing their primary attention?
Even among those thinking about structural costs, most have only scratched the surface. Our recent poll of manufacturers showed an overwhelming focus on G&A cost reduction – an important starting point, but only one step in the journey. Tougher areas such as portfolio rationalization, complexity reduction and footprint optimization are now more important as companies continue to struggle with profitability and performance.
Dissecting structural costs
Which of the following areas is your company primarily targeting for structural performance improvement?
Here are a few ideas to consider as you start your efforts to reduce structural costs:
- Attack business complexity. In this environment, you can’t afford to do everything – take a fresh look at products, customers and geographies. Shrinking may be the best path to growth, liberating resources for critical investments.
- Shift fixed costs to variable. From headcount to technology, this is the time for flexibility. Look for ways to take on the many quasi-fixed costs in areas like benefits, labor/staffing and manufacturing to make them variable using tolling and outsourcing as examples.
- Go beyond G&A – and Rethink MSR&D. Rethinking marketing and spend management as well as R&D is critical to reset spend levels for business conditions and focus limited resources on what’s most important.
3. Get ready for the upturn
Nobody knows when the upturn will begin to take shape. And when it does, it will vary by sector, market and customer. Only 27 percent of manufacturers polled indicated that their plans for the upturn were in place, with their organizations ready to act. Preparing the organization for the upturn will be critical to understanding the options and constraints the business will face as the economy returns.
Prepared for the upturn?
Is the organization prepared to respond to the upturn as positive trends develop in the marketplace?
Make no mistake: this is not the time to be short-sighted. Proper scenario planning is critical. But planning for the upturn will demand a different mindset – particularly if current conditions last well into 2010. The business environment that takes shape will likely be unfamiliar territory for many companies. Put everything on the table, from your product portfolio decisions, the markets you will compete in and the talent you will need to drive results.
It’s a tall order, but nearly every one of your competitors is facing the same challenges. Preparation may be the only difference between tomorrow’s market leaders and the also-rans. Here are a few things to keep in mind as you begin to outfit your organization for the new market realities:
- Stop talking about planning and do it. Be prepared for what’s next and have the right planning framework in place. Scenario planning is critical for helping the business leaders anticipate and consider responses to changes in the marketplace. When the economy starts to heat up, time and resources will be constrained. You’ll wish you had spent the time analyzing your options and preparing the business to respond.
- Target smart growth. If the last economic expansion was marked by rampant growth, this one should be about smart growth. What opportunities will present themselves? How can you exploit your market and customer strengths? How can you best allocate limited resources and take the baby steps needed to drive progress? Do you have the financial strength to take advantage of the favorable M&A market? Are you prepared to act as conditions change? Drive the new growth culture without losing sight of adding real economic value to the business.
- Take charge of talent. Multiple across-the-board reductions have stripped talent from the organization. Evaluating your talent and aligning with your expected business needs may mean the difference between success and failure. Now is the time to strengthen your overall playbook for talent management; decide the best way to take advantage of talent in the marketplace. Redesign incentive structures to attract, reward and retain your critical talent resources.
You’ve made it this far – an accomplishment in its own right – but that doesn’t mean you’re out of the woods. Chances are, you already have a full plate, and are working with constrained resources and expectations are growing. But this is the time to address the tough issues limiting business performance. Securing the business, tackling structural costs and preparing scenario plans can help get your organization on solid footing. And as business shows signs of life again, your company will be better prepared to respond quickly to new opportunities, establishing a stronger position with customers, competitors, suppliers and employees along the way.
Tim Hanley is vice chair and leader of Deloitte’s Process & Industrial Products Sector; John Dixon and David Brainer are both principals, Deloitte Consulting.
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