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Rightsizing your company can enhance its performance and profitability

It's a fact: For a business to be successful, income must be greater than expenses. The company must find the optimum size with respect to its market and prevailing economic conditions to efficiently service its customers.

For most distributors, this has meant layoffs during the economic downturn.

"Rightsizing is not downsizing," cautions Steve Thompson of Texas A&M University. "Be careful about that distinction, it's essential to success in the long haul."

Thompson is an associate professor at Texas A&M's Thomas and Joan Read Center for Distribution Research and Education in College Station, Texas. He says it's critical to understand the true performance drivers of an organization.

"It requires a balanced approach to increase or decrease the size of an organization," says Thompson. "There has to be an understanding of the strengths and weaknesses of the organization, itself."

From that understanding, Thompson says an organization should alter its size to fit its market and customer base.

"Rightsizing is certainly one of the hardest parts of management," says distributor Allan Chartier. "It involves a close examination of all of the available forecast and budget information, then expenses must match with the projected revenue."

Chartier is president of Omaha, Neb.-based Midwest Industrial Tools, Inc. He says the weak economy has required some layoffs at his machine tool and MROP distributorship.

"The first thing we did was to look at personnel expenses," says Chartier. "[But] there are many options to reduce expenses beyond cutting salary and headcount."

Midwest Industrial Tools reduced its travel and entertainment budget, temporarily repealed employer 401k contributions and increased its healthcare deductibles. Chartier says the company also was able to reduce property and casualty insurance rates due to downward-adjusted sales forecasts.

Some functions that were outsourced in the past are now done in-house, adds Chartier. Midwest Industrial Tools also stopped using a cleaning service, which allowed the distributor to retain an employee's position.

"We also reduced some of our marketing expenses," he says. "This was a hard decision because it is crucial to pursue marketing to maintain sales, especially with capital equipment."

Layoffs were still necessary despite all efforts to trim costs. In the last two years, machine tool sales have dwindled. Midwest Industrial Tools reduced headcount in the accounting, human resources and purchasing departments, resulting in a 20 percent staff reduction. Chartier even sold his vacation home.

"I couldn't lay people off and then take a vacation in good conscience," says Chartier. "Layoffs are a serious matter that affect people's lives."

Chartier says he shared the company's economic situation with the employees and, as a result, workers have taken on extra duties during the downturn.

"It is important to maintain service levels," says Chartier. "We retained our application engineers, sales staff and customer service personnel. It is important to retain staff that deal with the customer directly."

Chartier says rightsizing is also about growth. When capital equipment sales are down, the distributor concentrates more on its MRO business. This has helped Midwest Industrial Tools through the downturn in the machine tool industry.

"Expense is only one side of the equation," says Chartier. "We also look to define new sources of revenue."
For instance, the distributor has taken on some new product lines that complement its traditional offerings and has added repair and re-manufacturing services.

"Customers are trying to keep older machines running to reduce costs," says Chartier. "This has become a great profit center. This is still a virtually untapped revenue source that we expect to grow during the economic recovery."

The efforts are paying off, Chartier says. Even though the economy remains weak, Midwest Industrial Tools has been able to recall some of its employees.

Whether the economy is good or bad, it's critical to have close, in-depth communication with customers and find out what is happening in their markets, says Joseph Martha, vice president of the supply chain practice for Mercer Management Consulting in Lexington, Mass. Close communication, he adds, is the only way to get realistic business forecasts. Martha also suggests making two or three plans addressing different business conditions that may occur in the future.

"Scenario planning is crucial," says Martha. "It is essential to keep in close contact with the marketplace to enact the proper measures."

Another measure that distributors can take is to make the workforce more fluid, says Martha. Trained staff are valuable. According to INDUSTRIAL DISTRIBUTION'S 56th Annual Survey of Distributor Operations, finding and retaining qualified personnel remains a top concern and 55 percent of distributors expect to hire more sales representatives over the next two years.

"Hiring and training employees is expensive," says Martha, which is why he says it pays to be creative in retaining them.

To that end, many distributors have adopted furlough plans. Typically, this involves employees working 10 months of the year. Other companies have instituted a 35-hour work week. In this economy, many employees are happy to have any job at all, says Martha. This opens possibilities to retain employees on a part-time basis.

"This spreads the pain over the population without losing valuable employees," says Martha. "If you lay off good employees, chances are that they won't be available when it comes time to expand again."

It also means that the organization is better positioned for the recovery and growth. It can rapidly ramp up operations without the expense of hiring and training new people.

Value your employees

"Though salary and benefits costs are high, so are the costs of laying people off," says Texas A&M's Thompson. "It is important to view employees as a human resource rather than merely an expense."

There is a downside to putting a formerly loyal employee out on the street: He might end up working for a competitor. It's important for distributors to be in touch with their core competencies and identify the staff members that enable those services.

Outsourcing can be a great tool for a company looking to grow without taking on hiring and training expenses, says Thompson. However, exercise care when outsourcing in a downturn.

"Fear and paranoia on the part of existing employees can interfere with the program's success," says Thompson. "Also, it is important to identify and outsource only cost generators rather than revenue sources."

With outsourcing, there is always a concern that the quality might not meet the distributor's standards, cautions Thompson. Therefore, quality measurement and assurance is essential in any outsourcing arrangement.

"When times are tough, focus on what you do well," says president Stafford Sterner of SJF Material Handling Inc., in Winsted, Minnesota.

SJF encourages employees to cross-train in various duties by offering them incentives for learning other job responsibilities, says Sterner. The practice gives the distributorship options to replace critical staff members without major disruptions should someone leave the company suddenly.

"It also increases employees' value within the organization and better secures their position in the event of downsizing," says Sterner. "An employee that can perform many duties can work in a different position when workload demands vary."

For instance, a welder that can assemble drives or operate machinery can maintain his value even when there aren't any welding jobs, says Sterner. As a company downsizes, it may be necessary to consolidate duties.
"If the company can utilize its talents and the employees can be productive, it's a win-win situation," says Sterner. "Flexibility is key."

Design for success

While flexibility is good, churn and disruption within an organization isn't, says Thompson. He suggests looking beyond changes in headcount and looking at inventory as a way to streamline a distributorship in a downturn.

"Distributors that manage inventory more efficiently can gain a distinct advantage," says Thompson. "The long-term benefits are far greater than the short-term cost savings resulting from layoffs."

Efficient inventory management will better position the company for the next cycle of growth in an economic recovery, adds Thompson.

"Managers tend to focus on the number of people," says consultant Dave Kahle. "It's more important to look at the business as a system."

Once the system is defined, it becomes a simple matter to determine the skills and abilities needed to make that system function properly, says Kahle, who is president of The DaCo Corp. in Grand Rapids, Mich.

"Slowdowns tend to reveal problems within systems," says Kahle. "It also means that employees are more willing to accept change, especially if the alternative is unemployment."

This is a good time to reassess compensation and incentive structures, as well. As many as 40 percent of customers may not warrant the attention and costs of an outside sales representative and yet the distributor is paying commission on those accounts.

"This is a good time to send a wakeup call to seasoned and content salespeople," says Kahle. "In a typical organization, 20-30 percent of the sales staff is far from profitable."

Most sales agencies reward sales volume rather than profit. It is important not only to change the requirements expected of employees, but to change the structure of the organization and its compensation to support those goals.

"If you improve the design of the organization, employee behavior will follow in that design" says Kahle. "This will drive greater efficiency throughout an organization of any size."

RELATED ARTICLE

Seven steps to rightsize" your organization (without taking a toll on your people)

1. Examine every item in your budget.

Take an opportunity to review every expense in your business to make sure there is a return on every item of investment. Activity-based costing can be of great assistance in reducing waste and maximizing your return.

 

2. Cut waste in the warehouse.

Inventory is one of the largest expenses in a distribution operation. Reducing slow-moving and dead stock can have an effect on cash flow and profitability.

3. Modify the structure of your business.

Once you have eliminated all of the waste in your organization, explore new ways to make your employees and your business more efficient and profitable.

 

4. Talk to your customers.

Make time to really get to know your customers' business and the markets into which they sell. It is impossible to have truly accurate forecast information without an intimate knowledge of your customers' business outlook.

 

5. Look for new opportunities.

Once you reacquaint yourself with your customers, you may find new product lines or services to offer them. Seek new markets that can benefit from your product and service offerings.

 

6. Be creative in retaining employees.

The costs of hiring and firing may be higher than the pay and benefits saved by laying off employees. Cross-train your employees. In an up or down market, an employee that is skilled in more duties is more valuable and better understands their role in the organization.

 

7. Examine outsourcing options.

In a down market, bringing back certain outsourced functions may save jobs and reduce costs. In a recovery, outsourcing certain functions can lead to faster growth without the concerns of hiring and training new staff.

COPYRIGHT 2003 Reed Business Information in association with The Gale Group and LookSmart.