Based on initiatives undertaken by more than 4,000 Ontario manufacturing companies during this difficult period, here are some of the lessons that are applicable to any size manufacturer.
August 8, 2011
by Pete Mateja
Over the past several years, the Office of Automotive and Vehicle Research in Windsor, Ont. has worked with a number of manufacturers that needed advice on how to survive in a downturn. Based on the initiatives undertaken by more than 4,000 Ontario manufacturing companies during this difficult period, here are some of the lessons that are applicable to any size manufacturer.
1. Cash is king. During the recession, many CEOs, including those of major corporations, began monitoring cash on a daily basis, de-emphasizing monthly financial statements. Some were even doing it twice per day – once mid morning and then at the close of business. Spending decisions were often deferred until the company was in a better cash position. With the economy improving, some manufacturers are no longer watching the cash position daily. Neglect this and you may leave yourself open to some unpleasant surprises.
2. Know your banking covenants. While managing day-to-day activities, especially during crisis situations, some CEOs ignored the conditions of their banking covenants. You can be sure their financial institutions did not. As a result, many of them were surprised when they received unexpected telephone calls or letters indicating the company had breached its banking covenant, a costly error. The financial institution normally levies a penalty, offers unwanted help, imposes new restrictions, reduces the credit line, increases the interest rate, or worse, calls in the loan. This could happen even because of a violation for only one day. Monitor the covenants on a daily basis.
3. Look for ways to increase productivity. Favourable tax treatments combined with a number of attractive government funded programs and a stronger Canadian dollar are allowing manufacturers to upgrade machinery and software. Canada’s productivity lags the US and the gap widened during the recession. Many companies attempted to adapt lean manufacturing principles; however, lean is not a program of the month. It’s a culture that takes years to effectively implement and maintain. As the economy recovers and more companies are profitable, lean is losing is visibility. That could be a fatal mistake. Global competitors want a share of the Canadian market. Canadian businesses must continue to upgrade their machinery and software while maintaining a lean culture to improve productivity.
4. Know the status and profitability of your customers. During the recession, many companies went bankrupt or required major financial restructuring because some of their customers defaulted on payments. For some, the loss of one or two major customers was all that was needed to tip them into financial disaster. One privately owned medium-sized manufacturer had to write off more than $1.2 million in bad debts, $500,000 of it attributed to one customer. Fortunately, this did not cause the firm to go into bankruptcy but the write-off did wipe out its profitability and strained the operation for some time. Some successful firms kept tabs on the profitability of their customers and eliminated those that did not achieve an acceptable level. Surprisingly, with fewer customers, some manufacturers found their profits increased. Don’t lose focus of your revenue sources. Review customers’ financial positions monthly and don’t take on new business if it doesn’t make a positive contribution to the bottom line.
5. Take advantage of government programs. There are a number of them available across Canada, including Automotive Partnership Canada, FedDev, AIME and SMART. Numerous companies took advantage of them and some qualified for multi-awards. There were outright grants while others matched a company’s investment dollar for dollar. Unfortunately, with most Canadian provinces wishing to eliminate budget deficits by 2012, and with the economy strengthening, many of the programs are ending. Connect with the local Ministry of Economic Development and Trade’s NRC Industrial Research Assistance Program (IRAP) and local economic development representatives about the various government programs. Since they change regularly, make sure you are on their contact lists. Both the federal and provincial governments have money available to help you become more competitive.
6. Invest in market and/or new product development. These initiatives are costly and may not be for every company. Both require adequate financial resources, patience, a tolerance for risk and qualified manpower. For some companies, market development means selling outside Ontario or to new customer industries. For others, it means selling to customers in the US, Mexico, Europe or Asia. The US market is enough for some. For instance, California has a population of 37 million, which is larger than the population of Canada. Usually, the farther the market, the riskier it becomes.
New product development is not for the faint of heart; however, many businesses invested in new products and services during the recession, especially those with global competitors in the automotive, high tech and medical/pharmaceutical industries. Innovation is critical to winning a major competitive position and not being vulnerable to price concession demands from aggressive buyers.
Dr. Robert G. Cooper, who has been called the grandfather of new product development, has stated that there is a failure rate of 25% to 45% for new products. Other sources place the failure rate higher than this. It’s also believed that for companies to grow, at least 10% of a firm’s revenues should be derived from new products/services that were not offered the previous year. For a true and sustainable competitive advantage, investments in new product development are essential
7. Align with a partner. Academia is an under-utilized resource. Partnering with colleges and universities allows companies to acquire leading edge expertise without adding, training and then waiting for new staff to make contributions. During the recession, many companies increased their involvement with universities and colleges intending to gain a competitive advantage. Numerous Canadian government programs have offered funding grants to such partnerships. Auto 21, domiciled at the University of Windsor, is one of the most successful of these programs delivering leading-edge automotive R&D. Other help that academic institutions provide ranges from the development of business strategies and new market assessments to ergonomics, employee training and development. Forming a working relationship with them is one of the most cost-effective methods of gaining expertise in many areas and offers enormous financial benefits. It’s not surprising that most industry leading companies have worked closely with academia, some of them even funding chairs.
8. Make sure your business has a website that is current. For many buyers, this is their first choice for information. All industry leading companies have well-designed, advanced websites. Their sites look great because they’ve taken time to mature and build content, staying with or even ahead of industry trends. During the recession, smaller manufacturers used their websites as the primary medium for advertising and as a replacement for sales forces. Too many companies have neglected this valuable resource.
Although there are many lessons that can be applied to successfully growing a business, following these tips will ensure the journey is relatively trouble free and help your company take full advantage of the new economic environment.
Pete Mateja is co-director of the Office of Automotive Research, Odette School of Business, at the University of Windsor, in Windsor, Ont., and he served as the Executive Director of the Canadian Manufacturers & Exporters’ government sponsored SMART Program. Visit www.autowindsor.com.