The golden days are over. In recent months, the International Monetary Fund (IMF), the OECD, and leading German economic institutes have once again revised the expected economic growth for almost all industrialized countries downwards.
We still remember the financial crisis of ten years ago. And even if, according to many experts, the signs today are by no means as dramatic as they were then, the questions still arise: What did we learn from the crisis at that time? What can we do better today? How can successful companies arm themselves?
According to the IMF in April, the industrialized countries have achieved just 1.8 percent growth. The forecast for Germany was 0.8 percent. Even the current values of the ifo Business Climate Index do not give cause for hope. The mood has not been thislow since November 2014. The automotive, textile, and clothing industries are particularly affected.
Let us remember that ten years ago a recession of almost historic proportions hit many sectors. The financial crisis hit most companies completely unprepared.
What dramatically aggravated the situation was the lack of ability to take rapid countermeasures. Incoming orders had been declining for months in many cases, but inventories were full, and suppliers continued to deliver with undiminished intensity. After all, long-term supply contracts had been concluded. Personnel deployment was more or less inflexible, so short-term adjustments were not possible here either. Therefore, many companies were caught in the fixed-cost trap.
Successful companies have learned from the crisis: they focus equally and actively on costs and profitable growth.
One of the most important lessons learned is the reduction of the breakeven point. This is achieved by the consistent flexibilization of cost structures. Almost all areas of the company – such as production, the entire supply chain, and the support processes in IT – should be taken into account.
Restructuring or integration measures that have not been carried out consistently or at all will have immediate repercussions in such situations. Warehouse locations, sales offices, or production sites that are neither strategically necessary nor necessary in terms of capacity immediately burden earnings and liquidity in times of declining business. It is required to make the deep cut before it is too late and others hold the reins of action in their hands.
A flexible supply chain enables rapid adaptation. In our experience, the sales andoperations (S&OP) process is critical to success. Only those who can quickly reduce their tax burden will be able to adjust their working capital and thus conserve their liquidity. This process requires smooth, rapid coordination across the entire supplychain – from the customer to the supplier. A good S&OP process also works in the opposite direction: if there is a need, the pipeline can be filled quickly. The goal is to deliver before the competition is able to do so.
Material costs should also be put to the test in good time. In general, German companies have good cost discipline, but at peak times this is also neglected: unnecessary business class flights and meetings with lots of overhead as well as other nice-to-have (rather than the must-have) expenditures. Successful companies are returning to spending discipline in good time.
Countermeasures are also indispensable for personnel costs. In recent years, personnel costs have risen sharply in many companies and in some cases an irrational salary level has been called for. Here, too, companies must return to the ground of reality. Adaptation plans should also be developed, and measures should be negotiated with employee representatives at an early stage. Most collective agreements provide room for maneuver here, which should be exploited to secure employment in difficult times, on the one hand, and to prepare for better times on the other.
When it comes to preparing for crises, the “top line” should be taken into account. Successful companies have defined focus markets and focus customers in their sales strategy with the aim of extensive diversification. Very successful companies have managed to expand their services and after-sales business in such a way that fluctuations in demand in the primary business could almost completely be compensated for, because every time investments in new plants or capital goods in general are deferred, the existing equipment continues to be used and repaired. This creates opportunities for good service business.
Even if the financial crisis hopefully does not repeat itself, there are still enough areas for improvement to make the company well prepared and proactively ready instead of reactively ready to face cloudy economic prospects.
Over the past 17 years, we have successfully supported more than 400 projects by acting clearly, with a hands-on approach, and farsightedly. Which topics are you currently dealing with? Are you interested in thinking these topics through together? We look forward to hearing from you.