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Planning For A Post-Recession Economy

By Jeff Owens, President, Advanced Technology Services, Inc.Jeff Owens, president and chief operating officer of Advanced Technology Services outlines three strategies that manufacturers can take moving forward to improve their business and continue to grow.

Regardless of whether manufacturers believe the recession is over, there’s no doubt that the economic hammer created a new mindset -- and a new way of doing business. The shocking swiftness with which the recession hit, and the depths it reached, taught U.S. manufacturers that “wait and see” is no longer a business option. Going forward, the driver of all manufacturing trends is the realization that companies must be able and willing to act swiftly and decisively to address a business environment that can change with dizzying speed.

That need for nimbleness is driving three major trends among U.S. manufacturers. First, companies are intent on becoming financially healthy. Second, they are redefining “customer service.” And, third, they are re-evaluating their workforce needs.

A return to financial health

I see a renewed focus on the basics, including managing debt levels, strengthening the balance sheet, and rethinking/revising the business model. In addition to the drive for growth, being credit worthy is paramount. 

It should be Business 101 to understand that cash is king and crushing debt is … well, crushing. But the golden glow of a seemingly unending economic expansion caused some companies to make foolish choices. And the most foolish is piling on debt to meet long-term expansion plans. The cruelest lesson of the recession is that credit becomes tight at best, nonexistent at worst.  There is some truth that lenders mostly want to do business with companies that don’t need loans, ignoring those desperate for credit. It was lack of credit -- credit-worthiness -- that spelled the death knell for too many manufacturers in the past 18 months.

In a fast-growing economy, profits in some business units can mask the drag of other units that may be unprofitable, overburdened with debt or simply a bad fit for the company’s overall strategy. Complacent executives assumed there was plenty of time to work things out.

When the recession hit many manufacturers were shocked by the weak links in their growth strategies. They realized -- too late in many cases -- that time had run out to identify the most profitable strategies and markets. Debt levels that were manageable when most business units were humming along profitably became crushing when those units saw demand for their products dry up literally overnight.

Another step toward financial health is thoughtful, deliberate shrinking. Certainly some manufacturers had no choice but to reduce production and lay off workers. But as demand slowly ramps up again, the trend I see is companies asking the tough question: What is our core business? Where are our profit centers? Where are our best growth opportunities? Should we get out of some lines of business?

In other words, I am seeing smart executives look at the recession as an opportunity to rethink their overall business model. Shrinking may have been involuntary -- and not necessarily well thought out. But growth is going to be careful and deliberate, with emphasis on products and regions that can contribute relatively quickly to sustained long-term profitability.

Another aspect of rethinking the core business is a more conservative approach to inventory. In short, inventory is out.

When the recession hit, major manufacturers discovered their inventory could serve the diminished demand. Recent increases in production levels do not signal an uptick in demand; rather, it signals that inventories are finally depleted, and companies must ramp up production to meet the still-low demand for high-value goods, such as avionics and critical castings.

Lesson learned: Building up inventory doesn’t drive business or profits. Today we are seeing these manufacturers producing product only upon order. Sophisticated manufacturing processes allow delivery of even the most complex products in only weeks, eliminating any compelling business need to build up inventory.

Manufacturers have learned the lesson that it’s wise to shrink, rethink the core business, strengthen the balance sheet, and demonstrate credit-worthiness. Those companies will live to grow another day.

A new focus on customer service

The best business practice is making your customers happy and loyal. That’s ultimately what leads to growth and profits. And the recession taught all of us that putting customers first can pay huge dividends.

Shortly after the downturn hit, one of our major customers asked us to rewrite terms of a contract, drastically reducing our scope of work and our fee. The request represented a significant loss of money for us. We were well within our legal rights to demand adherence to the original terms of the contract, protecting our fee.

On the other hand, our customer was a major OEM who we knew was experiencing a huge drop in demand. Forcing adherence to the contract would inflict a huge financial blow and almost certainly strain our relationship. It was a tough blow for us, but we rewrote that contract and shared the financial hit. What we did not envision was the huge rewards our decision brought in terms of loyalty. This customer has asked us to bid on expanding our scope of work to three additional plants.

This was an enormous lesson to me and my company, and one I am glad to see was played out over and over in multiple industries in the past 18 months.

I am optimistic that “customer service” is a real trend, not just an adage for a poster. In fact, I predict that a common trait among the most successful U.S. manufacturers in the years ahead will be a demonstrated commitment to customer service. That translates to flexibility in interpreting or even revising contracts. It also means flexibility in managing day-to-day operations to meet even small shifts in customer needs.

“Flexibility” means approaching work from your customer’s point of view, not from the “we’ve always done it this way” point of view. A good example is staffing maintenance and repair -- my own company’s core business. Such employees traditionally were site-specific, resulting in idle people at one factory while their peers a few miles away may be working overtime to keep up. We now assign our maintenance and repair people to types of work, not to specific sites, and move people around within a small region to address shifting demand. It doesn’t cost us or the customer more, but results in quicker response -- something our customers love.

Re-evaluate the workforce

Renewed attention to customers’ needs is forcing manufacturers to take a long-overdue look at their own workforces.

In the traditional manufacturing model, workers were trained in a single skill. Even the highest skilled workers -- those in maintenance and repair -- generally worked in teams to address all the skills needed.

The recession forced deep, painful layoffs in almost every manufacturing sector. Just as the slow ramp-up is giving manufacturers time to carefully rethink their business strategies; it’s creating an opportunity to rethink the ideal work force to carry out those strategies. As production ramps up, I see manufacturers being selective in the workers recalled. Priority is going to workers with multiple skills or the ability to learn multiple skills.

Make no mistake about it: This trend is going to be painful to some. Long-time workers will not understand why skill sets trump longevity and loyalty. And plant managers will balk at making the tough choices. But it’s also important to understand this trend is real, and it’s a permanent mindset.

And the trend is new. The high-precision manufacturing plants I’m talking about are expensive. The biggest cost is equipment, which is highly complex and computerized -- and requires fewer people to operate. Because labor is a smaller and smaller percentage of total costs, there’s been a tendency for companies to pay less attention to their workforces.

Manufacturers are coming to recognize there is a small pool of people interested in factory jobs, and that this pool needs to be recruited, trained and retained. Necessity is indeed the mother of invention, so I am confident manufacturers will find creative ways to address the anti-factory bias and build strong workforces. A critical component is dispelling the notion that factory jobs are dirty, boring and mindless. We in manufacturing know -- and we must teach -- that today’s factory operations comprise expensive, complex equipment. The more complex the equipment, the more skilled the operators and maintenance/repair people must be. Training for these jobs is complex and lengthy.

Lastly, your work force needs a career path. Even more so, your employees need to know what that path is, and how they can most successfully travel it; it’s that communications strategy again.

The dividends will be tangible and immense. It’s your skilled workers who operate and maintain your expensive machines. When they understand the value of their work, and see it as a career rather than just a job, they’ll be happier and more productive. When they do their jobs well, your customers will be happy. If your customers are happy, your shareholders will be happy. So take care of the people who take care of your business.