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Cut costs, not customers

Management, Marketing | June 1, 2009 | By:

Think like your customers before making cost management decisions.

Getting a grip on how to navigate through difficult economic times is challenging even for the most seasoned business people. It may be tempting to fiddle with prices and expend significant resources in scrounging for new business, but experts advise a different path. Now is the time to focus attention on the fundamentals: managing costs and taking care of existing customers.

Keep the fundamentals solid

Cutting prices to try to build new sales is tempting, but by doing so, you could risk slighting existing customers. A better tactic is to focus on essentials that move your business forward, advises Eric Herrenkohl, president of Herrenkohl Consulting, Wynnewood, Pa. “You’ve got to make sure that basic fundamentals stay solid,” he says. “Otherwise you have a hole in the bottom of your bucket.”

Alton Martin, CEO of COPC Inc., Austin, Texas, agrees. COPC Inc. is a call center consulting company whose clients include manufacturers. “It’s easy to forget your existing clients are the ones that got you where you are,” he says. “Make sure you take care of them.”

This has worked for TCT&A Industries of Urbana, Ill. “We haven’t raised prices, and we haven’t lowered prices in an effort to get business,” says Kevin Yonce, CEO of the awning and tent maker. “We do a quality product, and a customer looking for that is going to pay what the product is worth.” These are great words to live by, if you can manage it. Yonce has—in part by adjusting his costs, including ordering a temporary cut in hours and pay for all of his workers, including himself.

The customer’s viewpoint

Maintaining your focus on customers while managing your costs is a tough balancing act, yet customers and costs are closely related. Indeed, when you cut costs, start with your customers, suggests Brent Terhaar, principal with the Minneapolis accounting firm Larson Allen LLP, and look at cost management through the customer’s eyes. “What is the most valuable thing for them?” asks Terhaar. “Work back from there. What does our customer value the most out of our business?”

Once you figure out what your customers think is vital, use that as a guide for cost management. For example, do customers prize the quality and consistency of your product? If so, how does that bear upon prospects for outsourcing? Can any outsourcer deliver the same level of quality that your own people routinely produce? “Does the overall cost savings really support this move?” Herrenkohl asks, and offers this model: Think about cost cutting at your favorite restaurant. No doubt it offers some things you could do without, but when it comes to the real reasons you patronize the place, dare it cut corners?

Protect your workforce

Labor is an obvious target for cuts, but skilled, experienced workers are a significant asset, and it is worthwhile to ask if an outsourcer could do what your own workers can do. If you lay people off, there is a risk that they won’t return when business picks up again. Getting top people back could be critical, but your best performers may be the ones least likely to return

“They’re probably the most employable elsewhere,” warns Virginia Harn, who advises manufacturers as a principal with Larson Allen. Cuts in hours or required furloughs are alternatives, but employers may worry that workers wouldn’t put up with that. Martin says, however, that a month-long furlough may be welcomed, and some veteran employees may actually have been looking for more time off. “It’s worked pretty well where we’ve seen it,” says Martin.

Across-the-board hour and pay cuts, like Yonce’s business, might also work better than expected. Yonce said he was pleasantly surprised that workers took it as well as they did. Some told him they preferred cutting hours over layoffs. It meant seasoned employees could avoid the inevitable exasperation of bringing new workers up to speed when the economy improves. In Yonce’s case, winter was a good time for recession. His busy season is summer, when staff tops out at nearly 50. In winter, workers mostly service rental equipment, so reducing hours, says Yonce, didn’t cause more errors.

At Caribbean Awning Production Co. Ltd. in Castries on the Caribbean island of St. Lucia, West Indies, managing director Paula Calderon discounted prices up to 20 percent to promote sales, but she also placed her 20 employees on rotation and on call for when work is available.

Working your niche

Executives in every business are walking the same tightrope: cutting costs versus maintaining customer relations. Customer experience goes beyond quality of goods, says consultant Herrenkohl, to the quality of customers’ interaction with your company. Don’t lose those moments, he warns.

Do these times offer opportunity? Yes, says Bill Whitley of Charlotte, N.C., a business consultant who takes a slightly different view. “Focus on smart growth, not reducing cost,” he says. “Refine your niche, create a referral-rich environment, get better at telling your story.” In short, zero in on what you do best. “If your scope is too broad, you’re wasting too much money on marketing,” says Whitley. “That’s not going to come home and pay off and help you grow your business.”

Cutting on the plant floor

Meanwhile, you might find some cost cuts under your own roof. A March study from the Massachusetts Institute of Technology (MIT) reports alarming inefficiencies in energy use in modern manufacturing methods. New manufacturing systems consume from 1,000 to 1 million times more energy per pound of output than older industries. Pound for pound, microchips use far more energy than manhole covers, the study of 20 manufacturing processes reports. MIT professor Timothy Gutowski notes in the study that manufacturers have traditionally been more concerned about price, quality and cycle time instead of energy, but energy will be more important as energy prices rise.

But innovation isn’t necessarily about high-tech glitz. Streamlining plant processes can be as simple as moving that pile of stuff out of the way so raw materials can move into production more quickly. And what’s that pile of stuff doing there in the first place? It’s better to buy material as needed. If you get a great price you may want to stock up in moderation—if you’re sure you will use it.

More useful tips

Regardless of a company’s size or the products it sells, these suggestions offer helpful support:

Cash is good. It’s a good idea to keep some cash on hand rather than push limits. “This is not the time to add the infrastructure and the capital improvements,” says Harn. “It’s the time to stay as liquid as you can, so that you can cover your working capital costs.”

A management system. Calderon advises businesses to get certification from the International Organization for Standardization (ISO), which requires best practices throughout the manufacturing process. Calderon says the effect is to help manage expenses. ISO certification may be a stretch for some organizations, especially in these difficult times, but Calderon says ISO principles help you get lean and make every dollar count. “The management system itself will help you reduce costs,” she adds

It’s a slowdown, not a stop. Whitley says it’s important to remember that “an economic slowdown is a slowdown, not an economic stop.” People still buy. “The question is,” he adds, “are they buying from you?” This is also a good time to practice for the next recession. Business cycles happen. The best firms are ready and manage their way through such downturns. You’re learning, day by day, how to do that right now. The prudent practices you pick up today will help your business manage its costs the next time the economy goes south.

Marc Hequet is a business writer based in St. Paul, Minn.

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