IN MY OPINION: Institute of Management companion Mark Abrahams, CEO of Fenner, urges manufacturers to maintain their creativity in the face of recession

IN MY OPINION: Institute of Management companion Mark Abrahams, CEO of Fenner, urges manufacturers to maintain their creativity in the face of recession - Life is tough for manufacturers. Increasing energy costs and competition from countries with low lab

by MARK ABRAHAMS
Last Updated: 31 Aug 2010

Life is tough for manufacturers. Increasing energy costs and competition from countries with low labour costs help to erode profit margins. The continual developments in information technology may allow us greater control of business information, but such information is also more easily accessible to our customers and competitors, which merely increases pressures on margins. And, just when we thought we were getting to grips with these issues, along came recession. Most of the developed world is in recession - at least, from a manufacturing perspective.

The natural response is to seek to expand or to consolidate, and this has led numerous companies to embrace the process of globalisation. In many industries this has resulted in markets being dominated by a number of large multinationals. The competitive pressures and the limited scope for growth perceived by many will ensure that this process continues as companies merge, acquire rivals or become acquisition targets themselves.

It is not surprising, therefore, that most manufacturers feel unloved by the investment community. With limited growth prospects, increasing competition holding back margins and the new management challenges that are being brought about by rationalisation and change, business valuation can be very risky for a prospective purchaser or investor.

In this context, risk usually means a depressed or low value. This has been reflected in most of the world's major stock markets for some time. Until recently, the effect was visible only in the old-economy manufacturers. However, the markets now seem to have established more realistic pictures of growth in many of the new-economy stocks as well.

But whether they are old or new, the reaction of all companies to these pressures is to cut costs. It is almost impossible to argue that it is not right to do this when revenues and margins tighten. However, cost-cutting can mean many different things: some are excellent, others represent the road to ruin.

Take a typical engineering company. To be competitive, it will have in place a continuous improvement programme. This will aim to reduce lead times, improve service and bring down costs. Cost-cutting in this sense is not a project but a process, and it will be as much part of the corporate culture in times of growth as it is in times of recession.

Some impressive statistics emerge from companies that undertake these programmes. However, these savings emerge through cultural and procedural changes that take time to implement; they are not achieved as a result of any short-term action. Furthermore, they are usually most successful when volumes are increasing and businesses are seeking productivity gains without increasing cost.

There is another type of cost-cutting that most companies undertake at some point. Euphemisms like downsizing or right-sizing are often used, but the simple fact is that managers will try to eliminate costs in line with any major down-turn in volumes. The pressure to do so is even more intense when margin squeeze adds to the difficulties.

I recognise that in times of recession costs must be trimmed to survive, but I believe this process is often taken too far. The reason for this is the intense focus on short-term profitability.

All businesses will carry costs relating to development, whether this be in products, services or processes. Much of this cost has only a small measure of short-term benefit, but it represents the seed-corn for the future, and should therefore be regarded as part of the fabric of the business.

In tough times, it is the creativity of manufacturers that can determine whether a business survives or not. It is therefore at his or her peril that any manager cuts into this part of the infrastructure.

Unfortunately, people continue to apply the practices of years ago. At one time there was sufficient 'fat' in many operations to enable them to withstand an aggressive culling of cost. This is less often the case now, and much of a manufacturer's overhead structure cannot be cut without affecting the value and the prospects of the business.

So, as we enter another difficult period in the economy, I would encourage all manufacturers to consider very carefully how they are going to survive in the long term before they act to improve their plight in the short term.

There are several key considerations: innovation, properly managed, is one of the greatest wealth creators. The critical resources of a business should be identified and preserved. Ensure that appropriate and adequate capital spend continues; this is particularly important during some of the more difficult times. Cost-saving must be made part of the organisation's culture, representing an important part of its continuous improvement programme. If downsizing must take place, the board should take care not to throw the baby out with the bathwater.

Most importantly, we should all remember that maximising profits in the longer term may mean forgoing optimum profits in the short term.

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