W&WP November 2001
Critical Times Call for a Critical Look at Business
By Tom Dossenbach
When I asked why he was in business, the Chicago-based manufacturer responded, "To make the best millwork possible for my customers." Another manufacturer thought I might be probing for a customer-oriented answer and thus replied he was in business "to satisfy the customer."
Fact is, they are both wrong. The reason for the existence of any business is to make money! How you go about doing that is the key to long-term success including quality, service and a host of other factors.
The tragic events during the past several months have cast a shadow over the economic recovery in our country, which will affect every segment of our industry and the ability for each company to make an acceptable profit. Whether your business is booming now or not, there has not been a time in the past decade when it was more important to take a critical look at your operation and to get lean - fast!
Each month for the past three years, I have written on subjects that have a profound influence on the profitability of any woodworking company. Some readers have written and told me how much a certain topic hit the mark for their company. Occasionally I get a report on the positive results someone has experienced by following the suggestions in this column. However, many have continued to drift and now find themselves in an overpowering storm.
Suddenly, there looms the prospect of not having enough work to keep these same employees busy. In a scenario like this, the obvious first reaction is to reduce labor costs to reflect current and future business conditions. If a company has been keeping good records, it will know the percentage of sales that the cost of direct and indirect labor represents and will reduce that cost to at least the budgeted level - or less.
Unfortunately, there is a tendency during a downturn for some employees to slow their work pace to match the workload. I have seen this in numerous situations. If you have more labor than is required, it is just human nature to slow down. When business is good and you are demanding maximum production, workers are very busy and this is the time when you freely add to the labor force. Now, it is management's responsibility to make the necessary adjustments in the labor force taking into consideration the current productivity of the workforce.
This exercise of adjusting direct labor cost is essential and straightforward - but it alone is not enough.
I cannot count the times I have been told by the management of a company that they do not have time to work on positive changes toward greater productivity and profitability because they are bogged down with their day-to-day problems. This seems to be true when business is good and true when business is bad. It reminds me of the old "can't see the forest for the trees" syndrome and is very dangerous.
It is very important for every company to step back and look at where it is today and where it wants to be in the future. Then it must determine if current plans and efforts are leading to this end. Even the smallest cabinet shop has plans that must be reviewed critically to make sure they are still valid. You should make every effort to determine a realistic sales forecast from your sales reps, dealers, etc. You will need this for planning purposes to stay ahead of the game instead of playing catch up in a declining market. Update these forecasts monthly so you can see the trends and will be able to identify the inevitable upswing in time to prepare for it.
We mentioned above the need to cut direct labor to that level indicated by your sales forecasts. Indirect labor is often considered a sacred cow, but it shouldn't be. I have found over the years that during boom times woodworking companies tend to find all sorts of needs for additional indirect people. Sometimes these seem worthwhile such as an additional inspector, or a specialized customer service person, or even a supervisor or manager of a new department. Some of these positions were hastily added in times of plenty and were never really needed. Once created, they are hard to get rid of. These positions must be reviewed and justified all over again.
We all know that the major cost of our products is the materials content, but we never seem to realize the tremendous opportunity for cost savings in this area. Typically, direct labor represents 15% or less of sales while materials costs are 40% or more. A 5 to 10% reduction in materials cost represents a tremendous savings. Therefore, all requisition and purchasing procedures need to be reviewed and vendors brought in to help cut materials costs. This is also a good time to analyze those outsourcing decisions made over the past few years to make sure they are still valid.
If you have not already begun, now is a good time to educate your managers and supervisors about continuous improvement and to get them to buy into the concept. When business slows, most employees become concerned with their future and are more than eager to participate in efforts to reduce waste. Give them the opportunity to make a difference and see how their desire to help will become infectious. After the training mentioned above, get everyone in the company involved in the process of conducting a 5S blitz in each department during the next few months.
Now Is the Time
I urgently suggest that you go to read and share the nine articles I have chosen below with your people if you have not saved back issues of Wood & Wood Products. Put these ideas to work for your company.
Please, don't say you don't have time to do it because you must do it! Whether your business is booming or slowing, this is an opportunity to help the company, no matter its size, get leaner and tougher for the months and years ahead.
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