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Who Will Fare Best if a Slowdown Occurs?
By Woodruff Imberman, Ph.D.
Imberman and DeForest
Many soothsayers are predicting gloom if a worldwide slowdown hits. These
predictions, which have been going on for years, are overblown and completely
out of focus says David Bowers, chief global investment strategist at Merrill Lynch.
Today, more people are employed than ever before, retail sales are good, housing
starts are up, inventories are reasonably normal (no overstock), and industrial
profits are pretty good for most companies. There are some soft spots, but there
always have been some soft spots. So what's different now?
The answer is our prosperity now depends in part on global conditions. Turmoil
in the Middle East and the Balkans has upset the economic situation. The same
applies to the unsettled conditions in Brazil, Peru, Ecuador. As a Wall St. Journal
story headline says: "It's Easy to be Smart in Boom Times, Here are Tips for
Slowdowns" (10-23/00). This present article follows the same prescription.
Important Question
The important question is this: if these predictions are now correct shouldn't
astute executives be doing something now to protect themselves for a coming
downturn?
Companies meeting their customer needs best will be the winners if any
slowdown occurs. Why? Because they are best at boosting productivity (thereby
cutting unit costs to meet tougher price pressures) and at trimming the cost of poor
quality (by curtailing cost of rejects and waste, which producers often under-estimate).
Those companies that concentrate on boosting productivity and cutting poor quality
costs will be the ones surviving a period of flat or declining world economic levels.
Auto Industry Example
The the automotive industry, perhaps the key driver of industrial nations' economies.
The auto industry is the trendsetter, accounting for one of every nine jobs. There is no
industry in the U.S. that is not affected, directly or indirectly, with what happens in the
automotive industry. Autos have become internationalized over the last 20 years, and
are now quite sensitive to global trends.
The Wall St. Journal described one auto customer waiting to show his patriotism
and decided to "Buy American" when he traded in his Volvo. So he bought a
Chrysler. Driving home, he read the fine print on the label, which said the car
had a 31 percent foreign content and had been assembled in Mexico. To top that,
he read that Chrysler had been bought by a German company.
What will the auto industry do if there is global slowdown? And what will
that mean to automotive suppliers and their employees? It is important to
remember that what occurs in the auto industry affects every industry, from
adhesives to zinc.
Quality and Price Pressures
In the last few years, automotive suppliers have been pressured to reduce
costs by raising productivity and quality. For example, the Automotive
Industry Action Group (AIAG), representing Detroit's Big Three, issued
QS-9000 in 1994. QS is an extremely comprehensive quality program that
Tier 1 and 2 automotive suppliers must follow. Not only did it mandate strict
quality standards, but rigid on-time delivery and lowered prices, as well.
The program has been so effective that it has been adopted by producers of
construction, agricultural, and industrial machinery, electronic and electrical
appliances, and a vast range of other durable goods — all eager to get more
from their suppliers — at a lower price.
Detroit, in its effort to reduce its number of suppliers, has gone "in partnership"
with them. This means longer-term contracts, but also yearly price reductions.
In February, 1999, for example, General Motors announced multi-year
contracts worth $11.7 billion for 90 percent of its steel needs through year 2002.
However, this was dependent on a three percent first year price cut by steel
suppliers. With the steel glut, mills are eager for whatever firm orders they can
book, even at low prices.
Reportedly, GM's contract calls for future steel prices to be three percent
less in 2001 than in 2000, which in turn are about three percent lower than in 1999.
This move has affected other automotive suppliers adversely. For example, the
Michigan-based Automotive Consulting Group, which represents 56 publicly
traded automotive suppliers in North America, reports that higher operating
costs at this group. Mr. Virag adds that this profit erosion is causing suppliers
to take on more debt, decreasing their return on investment. That's a shaky
outlook if a slowdown occurs.
Other Industries Too
The same situation prevails among suppliers of Catepillar and John Deere
and other OEMs in the construction and ag-equipment fields, as well as suppliers
in electronic and electrical fields, in the appliance industry and other durable
goods areas.
What do these trends mean for supplier prices in three to four years for producers
of complex axles, braking systems, suspensions, dashboards, and interiors like
those made by Arvin, Dana, Federal-Mogul, Modie and TRW? The Big Three
have some 16,000 such direct Tier 1 and 2 suppliers, and they in turn have
thousands of Tier 3 and 4 sub-suppliers, making the nuts, bolts and other
gizmos that go into the complex final assemblies.
If history teaches us anything, other industries will intensify their price
pressures on their suppliers, following the leads of Detroit and the other
durable goods industries. The overall effect could be enormous, placing
smaller suppliers and sub-suppliers under extreme pressures. How can any
supplier in any industry protect himself, his stockholders, and his employees
from this downward pressure, which may be coming?
Two Steps
Astute suppliers are taking two steps these days, to prepare themselves
for more extreme customer demands.
First, in their drive to become the low-cost supplier in a limited area, many
companies are devoting great effort to define and focus on core markets and
products, shedding the others. An external competitive survey is often done
through a short market analysis and customer reports.
An internal survey is more important. It is best achieved through an audit of
employees, supervisors and managers by an outside objective expert, and is
cogently described in an article in The Fabricator ("Improving Business
Through an Employee Audit Program", Dec. 1993. Also see: "What Your
Employees Can Tell You," Area Development, May 1987. For reprints see
endnote). Using the input from all levels within a company, an outside
objective expert can help a company analyze its current competitive strengths,
and then recommend ways to capitalize on them.
Second, no matter how effectively a company focuses on key markets and
products as it capitalizes upon its internal strengths, it must generate employee
cooperation in meeting company efficiency goals. But how? By installing
motivation/compensation systems to generate this critical spirit of teamwork.
Senior executive compensation is quote often tied to company performance.
Why not tie compensation of lower level employees to their performance and
innovation as well?
A properly designed pay-for-performance program motivates an entire
workforce to improve its overall performance — i.e. to achieve the needed
higher productivity, quality and delivery goals efficiently, on budget and on time.
Part of the value of the improvement is paid to employees as a bonus, and
part is kept by the company as equal savings. Thus, for each bonus dollar
paid to employees for their successful efforts to achieve the needed goals,
the company saves a like amount in reduced costs, lower scrap, etc.
Such a system, if well designed (no task for a well-meaning executive), is
self-funded. After installation, no new company money is required. Employee
bonuses are earned by incremental performance improvements that would
not otherwise have occurred — ditto with the similar company savings.
Properly designed and installed pay-for-performance programs product
17-22 percent annual improvements in productivity and costs-of-quality.
(A study, "All You Ever Wanted to Know About Gainsharing, But Were
Afraid to Ask," by the Association for Manufacturing Excellence, June,
1993, gives details. For reprints, see endnote.) Information on Gainsharing
is also available in the November/December issue of Wiring Harness News.
When an executive contemplates the tangles of a global economy, the effect
of currency (Euro) devaluations, and the unrest in many parts of the globe, it
would be wise to prepare for the next slowdown, when it inevitably occurs.
It pays to listen to prudence, a wise teacher indeed.
Endnote: For complimentary reprints of the articles cited above, or for
other information, address requests to Dr. Woodruff Imberman, Imberman
and Deforst, 1740 Ridge Ave., Evanston, IL 60201. Fax (847) 733-0074 or
E-mail: Imbanddef@aol.com
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