How can you survive the recession…and prosper?

How can you survive the recession…and prosper? The probability of a deep recession means lower sales and tighter profit margins for specialized job shop coaters, platers and hot dip galvanizers, all flowing from the sub-prime mortgage mess and its aftermath. We see the stock market swooning, bankers becoming tight-fisted with their loans, and purchasing agents getting even more tighter-fisted with their orders. With this grim outlook, America’s auto makers, most original equipment manufacturers (OEMs) in other industries, and many industrial equipment makers – all customers of job shops – are cutting production, trimming operations, and insisting their purchasing managers drill down to extract the lowest possible prices from job shoppers for your services – often without a shot of Novocain.

Only the most effectively managed job shops with the highest employee productivity will survive. Large ones have professional headquarters staffers who can coach line managers to be more efficient and develop methods to boost employee productivity. Small ones often rely on knowledgeable consultants for short-term, affordable help to achieve the same goals.

Will you survive your customers’ demands for lower prices? Take a test – check your key financials against those of the rest of the plating and polishing industries. (Table 1) Where do you stand? If your financials are below average, here’s how to improve your profitability.

Survival Practices Adopted by Suppliers

Faced with declining sales and stiff foreign competition, cost-cutting domestic OEM producers of big ticket consumer durables and automobiles as well as manufacturers of construction and agricultural equipment, aircraft and industrial machinery have forced their suppliers to adopt five survival strategies. These are as follows.

Improving managerial effectiveness by more rigorous selection, development and compensation systems to develop more efficient managers who know how to define and focus on strategic company objectives, rather than doing busy work better delegated to subordinates.

Training first line supervisors to do better jobs of organizing and managing their employees’ work, not just their employees’ behavior.

Boosting worker productivity through innovative pay-for-performance programs like Gainsharing Plans to motivate employee performance. In 1983,

Congress’ General Accounting Office investigated such programs and cited Gainsharing as "...the wave of the future” because it unites an organization’s workforce in boosting productivity; the GAO found productivity rose on the average from 17 to 29 percent in those companies with Gainsharing.

Focusing just on core competencies, culling out marginal product lines and products, and dropping customers who are no longer profitable to serve.

Saving working capital through more rigorous collections and developing tighter internal controls to reduce accounts receivable and inventory.

Using computer technology and management information systems more effectively to coordinate all aspects of business.

Adopting lean manufacturing practices to eliminate waste, save costs and again, save working capital.

The best-managed platers, polishers and coaters combine these practices to cut per-

unit costs to a level that enables them to survive the tender mercies of their OEM customers’ purchasing agents, in whatever industry they sharpen their pencils.

Detroit Invented Mass Management, Production, Financing

Mass production requires sophisticated management and highly productive workers paid enough to be mass consumers whose purchases can be paid through mass financing. Over the decades, Detroit’s Big Three – Ford, Chrysler and General Motors – have used this formula to develop a wave of innovative business practices that have resonated throughout America, changing American industry, the American economy, and indeed, the American way of life.

Automotive industry cost-cutting practices began with Ford’s moving assembly line, (1913) providing high productivity and true mass production; Ford’s $5 a day minimum pay (1914) started giving real purchasing power to blue collar workers moving them along the road to middle class incomes and consumption. General Motors’ rationalization of its diverse businesses (1920-22) enabled it to build from a hodge-podge of independent car-making companies and parts divisions a successful, vertically integrated, centrally controlled organization coordinating parts-producing subsidiaries (self-starters, axles, etc) with autonomous, multi-functional car assembly divisions selling a wide variety of cars – from cheap Chevrolets to pricy Cadillacs. Walter E. Heller & Company’s installment financing (1923) expanded consumer purchasing power by extending installment sales from the traditional productive equipment (farm tractors, etc.) to the new consumer automobiles and other big ticket items like washers, furniture and refrigerators.

Simplified mass production of the standardized parts drove down the cost of American-made big-ticket items starting with Model T Fords; rationalized management enabled General Motors to build the world’s largest car company selling so many cars – over 60% of all sold in

the United States – that by the 1960s it feared the Department of Justice’s trustbusters would force its break-up. Mass consumption, fueled by mass unionization and higher pay, gave buying to blue-collar America; and mass financing allowed everybody to buy now and pay later. Yet the base of this mass consumption-mass financing pyramid still is American mass production, sparked by the low-cost American-made products made from American-made, standardized parts made at ever lower costs by highly productive American workers.

Modern Price Cutting Tactics - Again a Detroit Innovation

Today, The Big Three are no longer vertically integrated. They have evolved into mere assemblers of outsourced parts and components made by cheaper suppliers rather than continuing to be makers and assemblers in their own high-wage plants of those same parts and components into the cars and trucks driven off the assembly lines.

Today, few plating companies and job shop coaters make the finished products that consumers buy. Rather, they plate or coat the parts used in big ticket consumer durable and industrial product makers who have adopted Detroit’s cost-cutting practices. These include: insisting on lean manufacturing and just-in-time delivery practices to save their own inventory expenses and working capital; boosting employee productivity, and exacting price concessions from their own suppliers as a price of continued business.

Detroit’s automotive industry buys more parts and components from more suppliers than any other industry in any other country worldwide. Ford, GM and Chrysler purchased $171 billion in domestic-made auto parts in 2005, supporting about 480,000 supplier jobs. Foreign auto makers – the transplants – bought another $50 billion in parts, sustaining another 140,000 such jobs in US plants. See Table 2 for Detroit’s outsouring.

Specifics of Detroit's Price Cutting

The specifics of Detroit’s pressure on suppliers for price concessions are rarely reported. The concessions the Big Three and their Tier I suppliers have demanded from Tier II, III and IV suppliers over the past decade have been painful, driving some of these suppliers close to bankruptcy …and others into it. The accompanying tables give the details of Detroit’s demands(Tables 3a and 3b).

This is Detroit’s way of transferring the expense of its own uncompetitive labor costs and unwieldy bureaucracies to others. Detroit is purchasing more and more parts from independent, lower-labor cost suppliers who in turn transfer this pressure to their own specialized suppliers of coated parts and assemblies.

Detroit Now Focuses on Assembly

The strategy of buying cheap parts from independent suppliers with (hopefully) lower labor costs has led to six key changes in Detroit’s business model.

Their present focus is on core competencies, i.e., “doing what they do best,” and subcontracting all non-core work from the their own high-cost unionized workforces to non-union suppliers or those with union contracts with lower pay rates. The old business model of vertical integration is passé.

Their present awareness that people expenses are about 65% of operating costs. OEMs everywhere are trying desperately to lower their people costs by outsourcing work to others with lower costs, and by re-negotiating their union contracts.

Their present use of E-commerce auctions staged over the internet to aid their searches for low cost suppliers worldwide.

Their present new global view of suppliers. Since they sell their products worldwide, the OEMs now similarly seek out the cheapest suppliers worldwide. With internet auctions, suppliers from Malaysia, Moldavia, or Mauritania all bid on the same job.

Their present push to save inventory and working capital by insisting suppliers use lean manufacturing techniques and make just-in-time parts deliveries, often hourly.

These Detroit practices have been adopted by the New Transplants (foreign auto makers with domestic assembly plants), and subsequently by virtually all other OEM providers of big ticket consumer and industrial products, and their Tier One suppliers.

While these practices have lowered OEM costs and the prices they pay for parts and components, the OEMs still need customers with confidence in their future who are willing to risk buying big-ticket items having the parts you coat or plate in their unseen innards. Consumer confidence ultimately pays for the parts you coat and plate for the OEMs. And therein lies the rub.

Sub-Prime Loans, Credit Crisis and Low Productivity

The effects of the sub-prime mortgage crisis, international financial crisis, and growing per-unit labor costs are all reinforcing the pressures inflicted by OEMs on their suppliers for better productivity.

Following the seize-up of credit markets in the summer of 2007, consumer confidence has fallen, along with housing prices, the stock market, and 401(k) retirement

funds. New home construction, existing home prices and sales, and purchases of other consumer durables, furniture, and automobiles all have nose-dived.

Bell-weather sales of cars and light trucks have tanked. Annual sales reached 17.4 million in 2000, and remained nearly at that for nearly five years. But sales fell by 2.5% to 16.1 million in 2007, due to high fuel prices. As General Motors CEO Rick Wagoner told auto analysts at a meeting in January 17, 2008, “As we look out, we’ve got to be realistic (that) we are facing some tough headwinds particularly here in the United States with a relatively weak industry.”

He wasn’t kidding then, and that was before the international financial crisis. American auto sales are estimated to be under 14 million this year, and will go down another half million in 2009, as nervous buyers search for financing, according to J.D. Power & Associates. Chrysler and GM will be forced into Chapter 11 unless they merge with government help, i.e., subsidy. The two companies have a network of about 10,000 dealers, U.S. sales of between $110 and $130 billion. They directly employee about 145,000 workers at more than 100 assembly, stamping and parts plants, and indirectly support another 400,000 -odd jobs at independent suppliers. The economic carnage of bankruptcy petitions would be terrific.

Somber predictions say the sub-prime mortgage crisis will be with us for years, with stricter terms on commercial and industrial loans, disappointing automotive and consumer durable sales, and slim prospects for quick improvement. All adversely affect the consumer confidence and the consumer spending that drives the American economy.

In self-defense, American OEMs have become ever more cost conscious. Lower consumer spending means fewer finished goods purchased, fewer parts needed for the fewer finished goods purchased, lower production, fewer jobs, excess capacity in the plating and coating industries, and price cutting to obtain jobs. The OEMs continue to outsourcing more while simultaneously making ever tougher demands upon suppliers for their parts and components. See Table 4 for growth of outsourcing in various industries.

Most job shop platers and coaters who supply the OEMs are smaller companies that cannot afford full time experts who can develop managers to their peak effectiveness, train first line supervisors how to organize their work, develop effective pay-for-performance programs, or design overall compensation programs to reinforce these efforts. For them, outside help is available on a short term basis from consultants skilled in these areas. Wherever they obtain the needed help, America’s job shop suppliers must follow Detroit’s traditions: to strive ever harder to improve their managerial effectiveness, to rationalize their business practices, to boost their employees’ productivity, and to lower their per-unit production costs, all in order to survive – and even to prosper. Will you be one of them?

An economic historian by training, the author, Dr. Woodruff Imberman, is President of Imberman and DeForest, Inc., management consultants. He has published prior articles in Paint and Coatings Industry Magazine on improving managerial effectiveness, supervisory training, improving employee productivity, and on implementing Gainsharing Plans. For further information on these subjects and the articles, please contact him at Imberman and DeForest, Inc.,